14 


The  Case  for 
Increased  Railroad 

Rates 


Abstracts  of 

Testimony  and  Arguments 

Presented  to  the 

Interstate  Commerce  Commission 


By  Railroads  in 

Official  Classification  Territory  in  the 

5  per  cent.  Advance  Rate  Case 

of  1913-1914 


THE  UNIVERSITY 
OF  ILLINOIS 
LIBRARY 


The  Case  for    w 
Increased  Railroad 

Rates 


Abstracts  of 
Testimony  and  Arguments 
Presented  to  the 
Interstate  Commerce  Commission 


By  Railroads  in 

Official  Classification  Territory  in7the 

5  per  cent.  Advance  Rate  Case 

of  1913-1914 


*L 


U/VA 


31 V 


Jj 

K 


RAILROADS  in  the  Eastern  Section  of  the 
United  States — what  is  known  as  Official 
Classification  Territory — applied  on  May  14, 
1913,  to  the  Interstate  Commerce  Commission  for 
an  increase  of  five  per  cent,  in  freight  rates. 

The  presentation  of  the  railroad  case  was  in 
charge  of  a  Committee  of  Railroad  Presidents,  as 
follows  : 


DANIEL  WILLARD  (Chairman), 

President,  Baltimore  and  Ohio  Railroad  Company 

SAMUEL  REA, 

President,  Pennsylvania  Railroad  Company 

(W.  C.  BROWN,  succeeded  by) 
A.   H.  SMITH, 

President,  New  York  Central  Lines 


In  a  statement  to  the  Commission  on  May  1, 
1914,  closing  the  argument  for  the  railroads,  Mr. 
Willard  said : 

J"  It  must  be  realized  that  the  problem  con- 
fronting these  carriers  goes  far  beyond  the  scope  of 
this  particular  proceeding.  Yet  the  facts  which  we 
have  attempted  to  bring  before  the  Commission  in 
this  proceeding  are  highly  illuminating  with  refer- 
.    ence  to  this  general  problem. 

"  We  have  prepared  short  abstracts  of  the  more 
important  portions  of  the  evidence,  and  distributed 
them  throughout  our  territory.  . 

"  We  have  restricted  what  we  distributed    to 
C    statements  of  facts  actually  presented  to  this  Com- 
mission.    Everything  has  been  done    frankly  and 
candidly,   not   to    mislead   but  to    inform,  and   in 
accord  with  what  we  believe  were  considerations 
5    of  sound  public  policy." 

The  following  pages  comprise  the  material 
sent  out,  and  embody  the  main  facts  and  principles 
upon  which  the  carriers  based  their  contentions. 

353808 


Index 


Subject 

General  : 

Cost  of  Railroads1  Living  : 
Testimony  of  W.  C.  Wishart 

Difficulty  in  Securing  Capital : 
Statement  by  W.  H .  Williams 

Economic  Conditions  Affecting 
Railroad  Earnings  : 
Testimony  by  Charles  A.  Co- 
nant 

Economic  Justification  for  In- 
creases : 
Argument   by   George    F. 
Brownell 

Economies,  How  Railroads  Ob- 
tain     

Foreign  KreightRates,  Increases 
in  : 

By   M.  Colson 

Needs  of  Carriers  : 

Argument  by  George  Stuart 

Patterson 

Policy  of  Government  Toward 
Railroads  : 

Argument  by  J.  L.  Minnis  . 
Population  of  Eastern  District, 

Growth  in 

Railroad  Building,   Growth    in 

Rates,  Decline   in 

Wages,    Increase  in 

Plan    of    proposed    5    per    cent- 
Increase: 
Ingalls,   G.  H.,  Coal  Rates  in 

C.  F.  A 

Large,   R.   H.,  Coal  Rates  .    . 
Morris,    E.,    Central     Freight 

Association 

McCain,   C.    C,   Trunk   Line 

Association 

Why  This  Plan  Was  Adopted 
Statistics  : 


Page 

141 
136 

55 


49 


61 


/ 


33 

33 

51 

51,  109 


105 
98 


90 


/ 


Earnings,  How  They  Have  De- 
creased   

Expenses,    Increases 

s¥ox   35    Railroads  for  Eight 
Months    Ending   2/28/14  . 

For  Railroads  in   Eastern  Dis- 
trict Last  Decade 


44,  125 
39 

163 

33 


Subject 

Statistics  (Continued)  \ 

For     Pennsylvania,    Baltimore 

and    Ohio,    and    New   York 

Central    Systems    for    Seven 

Months  Ending  1/31/14  .    . 

For  Railroads  in  Central  Freight 

Association      

Population  of  Eastern  District 
Railroad  Building 

Wages,  Increases  in 

*     *     *     * 

Baltimore  and  Ohio  Railroad    . 

(See  Daniel  Willard) 
Brief  for  Railroads,  Abstract    .    . 

Brownell,  G.  F.: 

Economic  Justification  for   In- 
crease     

Request  for  Early  Conclusion 

of  Case 

Butterfield,  O.   E.,  Argument    . 
Capital,  Difficulty  in  Securing: 

Statement  by  W.  H.  Williams 
Central  Freight  Association  : 
Argument  of  J.  L.  Minnis  .    . 
Opening  Statement  by  F.    A. 

Delano 

Statistics  Concerning  Railroads 


Pa«re 


125 

46 

33 

33 

51, 109 

125 


Statement  by  E.  Morris,  Chair- 
man   

Testimony  of   W.  C.  Maxwell 
Testimony  of  F.  A.  Delano  . 
Testimony  of  G.  H.  Ingalls  . 
Coal  Rates,  Proposed  Increases  in: 
G.  H.  Ingalls,  Testimony  .    , 
R.  H.  Large,   Testimony     .    . 

Colson,  M.: 

Article    on     Foreign     Freight 
Rate  Increases 

Conant,  Charles  A.,  Testimony 

Cost  of  Railroad's  Living  : 

Testimony  by  W.  C.  Wishart 

Crawford,  C.  P. ,  Testimony  : 
Decrease  in   Purchasing  Power 
of  Money 


119 

XXXV 

136 


19 

46 

90 
114 
131 
105 

105 
98 

61 

55 

141 

53 


Index 

Subject 

Delano,  F.  A 

Opening  Statement 

Testimony 

Economies,  How    Railroads  Ob- 
tain    

Economic    Justification    for   In- 
crease : 
Argument   by   George    F. 
Brownell 

Erie  Railroad  : 

Testimony  by  C.  P.  Crawford 

Expenses,  Increases  in 

Foreign  Freight  Rates, Increase  in : 
Article  by  M.  Colson  .... 

Ingalls,  George  H.,  Testimony  : 
Proposed    Increase   in    Coal 
Rates,  C.  F.  A 

Large,  R.  H.,  Testimony  : 

Adjusting  Proposed  Increase  to 
Coal  Rate  Structure  .... 

Maxwell,  W.  C,  Testimony  .    . 

Minnis,  J.  L.,  Argument  ■ 

Policy  of  Government  Toward 
Railroads 

Morris,   E.,   Testimony  .... 
McCain,    C.    C,   Statement    for 
T.  L.  A 


x — 

Continued 

Page 

Subject 

Page 

48 

New  York  Central  Lines  : 

19 

Argument  by  O.  E.  Butterfield 

XXXV 

131 

Patterson,  George  Stuart : 

The  Needs  of  the  Carriers  .    . 

XV 

49 

Pennsylvania  Railroad: 

Rea,  Samuel,  Testimony  .    .    . 

155 

Rodgers,  J.  G.,  Testimony  .    . 

150 

Wallis,  J.  T.,  Testimony  .    . 

145 

XX 

Policy    of    Government  Toward 
Railroads  : 

53 

Argument  by  J.  L.   Minnis  . 

xxvii 

39 

Rates,  Decline  in 

51 

Rea,  Samuel,  Testimony     .    .    . 

155 

61 

Rodgers,  J.  G. ,  Testimony     .    . 
Trunk  Line  Association  : 

150 

105 

McCain,  C.C.,  Statement  .    . 
Wallis,  J.  T.,  Testimony    .    .    . 
Willard,  Daniel  : 

85 
145 

98 

Opening  Statement 

1 

Statement  on   "78  Questions  " 

111 

114 

Statement,  Closing 

xlii 

Testimony  of  .    .    , 

127 

Williams,  W.  H.,  Testimony: 

xxvii 

Difficulty  in  Securing    Capital 

136 

90 

Wishart,  W.  C,  Testimony  : 
Increased     Cost     of    Railroad 

85 

Living 

141 

Arguments 


3U  LLETIN    A 


The  Case  for  Increased   Railroad   Rates 


Ai'iMi.  27,  191  I. 

The  thirty-five  railroad  systems  which 
are  appealing  to  tho  Interstate  Commerce 
Commission  for  an  increase  in  freight 
rates  to-day  filed  with  the  Interstate  Com- 
merce Commission  their  hriefs  summariz- 
ing the  position  of  the  railroad  compa- 
nies. 

The  brief  devotes  considerable  attention 
to  the  purely  economic  features  of  the 
case.  It  is  set  forth  that  the  purchasing 
power  of  money  has  so  decreased  in  the 
eighteen  rears  "that  the  purchasing 
power  of  the  moneys  now  paid  for  freight 
on  the  railroads  of  the  country,  generally. 
were  in  1012  approximately  30  per  cent. 
m  the  market  for  commodities  than 
it  was  in  1896." 

"•Imagine  the  protests,"  say^  the  brief, 
•"and  the  unscttlemcnt  of  the  value  of  rail- 
road securities  in  the  market  if  it  had  been 
proposed  by  law  in  1896  to  require  the 
railways  to  reduce  their  rates  and  the  com- 
pensation received  by  them  for  their  serv- 
ices from  35  to  40  per  cent.,  or  if  an  order 
had  been  made  by  this  Commission  to  any 
such  effect.  Yet  witnesses  have  shown 
that  the  actual  rates  and  actual  compen- 
sation have,  by  reason  of  the  diminished 
purchasing  power  of  the  dollar,  heen  low- 
ered far  in  excess  of  the  apparent  lowering 
as  measured  in  gold  dollars." 

'"The  railroads  are  still  required  to  sell 
their  services  at  rates  to  pay  even  less  than 
established  years  ago,  after  competi- 
tion had  forced  them  to  a  low  level,  and  to 
take  their  pay  in  a  depreciated  currency. 
while  they  must  buy  their  labor,  buy  their 


materials,  borrow  their  capital  and  pay 
their  taxes  on  the  basis  of  present-day 
commodity  prices." 

Alter  presenting  in  detail  the  situation 
as  relating  to  different  roads  or  groups  of 
roads,  the  conclusions  of  the  carriers  are 
1 1 uis  set  forth  : 

"We  have  shown  a  steady  decline  in  the 
ret  urn  on  the  money  which  has  gone  into 
the  transportation  plant,  i.  e.,  the  road 
and  equipment. 

"'We  have  shown  (a),  that  in  the  period 
15)03  to  1913,  the  net  operating  income 
per  cent,  (of  the  thirty-five  roads  em- 
braced in  this  proceeding)  on  the  money 
which  went  into  the  property  investment 
account,  was  an  amount  equal  to  4.31  per 
cent,  in  1913  over  1910.  The  rate  of  re- 
turn on  property  investment  was  5.85  per 
cent,  in  1903,  6.28  per  cent  in  1910  and 
5.36  per  cent,  in  1913. 

"Comparing  1913  with  1910,  the  com- 
bined property  investment  increased  $659,- 
862,588,  while  operating  revenue  increased 
$186,775,667.  Including  taxes,  which  in- 
creased over  $11,579,165,  expenses  in- 
creased more  than  $201,301,462,  so  that 
net  operating  income  decreased  $16,311,- 
000,  or  nearly  5  per  cent. 

"Iii  other  words,  after  increasing  in- 
vestment 11.74  per  cent  and  gross  rev- 
enues 15.09  per  cent.,  there  wai  no  result- 
ant increase  in  net  operating  income;  on 
the  contrary,  there  was  realized  $10,311,- 
32 1  less  net  than  was  earned  before  the 
*(i.'>!).862,588  was  added  to  the  property 
investment. 

"(b)  That  during  the  1903-1913  period, 
the  Baltimore  and  Ohio  Svstem  increased 


their  property  investment  account  by 
$116,387,481,  with  a  decrease  in  net  op- 
erating income  of  $829,021,  and  that  be- 
tween 1910  and  1913  their  property  in- 
vestment account  increased  $56,634,002, 
with  a  decrease  of  net  operating  income 
of  $660,791,  notwithstanding  the  fact  that 
in  1913  their  operating  revenues  exceeded 
L903  by  $35,837,724,  and  exceeded  1910 
by  $13,341,491.  The  rate  of  return  on 
property  investment  was  6.01  per  cent,  in 
1903,  5.21  per  cent,  in  1910,  and  4.52  per 
cent  in  1913. 

"(c)  That  in  the  case  of  the  Pennsylva- 
nia System,  the  property  investment  ac- 
count increased  $530,750,073  between 
1903  and  1913,  with  an  increase  of  only 
$11,860,533  in  net  operating  income,  or 
an  amount  equal  to  2.23  per  cent,  on  the 
increase  in  property  investment,  and  that 
between  1910  and  1913  that  same  System 
increased  its  property  investment  by 
$207,186,919,  with  a  decrease  of  $11,485,- 
"ill  in  net  operating  income,  notwith- 
standing an  increase  in  1913  in  operating 
revenues  of  $148,861,269  over  1903,  and 
of  $47,057,640  over  1910. 

"The  rate  of  return  on  property  invest- 
ment was  7.49  per  cent,  in  1903,  7.41  per 
cent,  in  1910,  and  5.48  per  cent  in  1913. 

"(d)  That  between  1903  and  1913,  the 
New  York  Central  Lines  increased  their 
property  investment  account  $460,198,262, 
and  their  net  operating  income  $28,714,- 
151,  or  an  amount  equal  to  6.24  per  cent, 
on  the  increased  investment,  and  that  be- 
tween 1910  and  1913  they  increased  their 
property  investment  account  $159,606,173, 
and  their  net  operating  income  $3,765,591, 

iii 


or  ;m  amoonl  equal  to  &36  per  cent.  Op- 
e  rating  re  varan  increased  1903-1913, 
$124,520,099,  mil I  1«»1() -1013,  $48,981,231. 

'The  rate  of  return  on  property  invest- 
ment was  5.07  per  cent,  in  1903,  5.89  per 
cent,  in  1910,  and  5.47  per  cent,  in  1913. 

"(e)  That  between  1903  and  1913  the 
property  investment  account  of  the  Erie 
Railroad  System  increased  $88,459,748, 
with  a  decrease  of  $799,205  in  net  operat- 
ing income  or  no  return  on  the  increased 
investment,  and  notwithstanding  an  in- 
crease of  $19,133,219  in  total  operating 
revenues  during  that  same  period ;  that  be- 
tween 1910  and  1913  there  was  an  increase 
of  $24, ("517.024  in  property  investment, 
with  an  increase  of  $201,230  in  net  operat- 
ing income,  or  an  amount  equal  to  0.82 
per  cent,  on  the  increased  investment, 
while  in  that  same  period  operating  rev- 
enues increased  $8,247,449. 

"The  rate  of  return  on  property  invest- 
ment was  4.60  per  cent  in  1903,  3.G8  per 
cent  in  1910,  and  3.53  per  cent,  in  1913. 

"(f)  That  there  has  been  a  steady  and 
constant  increase  in  transportation,  main- 
tenance of  way  and  maintenance  of  equip- 
ment expenses,  an  increase  not  temporary, 
hut  of  a  continuing  character  due  to  the 
nature  of  the  underlying  causes,  such  as 
flic  increase  in  wages,  legislative  require- 
ments, and  the  necessitv  of  maintaining  a 
higher  standard  of  track  and  equipment. 

"(g)  That  the  operating  revenues  of 
the  carriers  are  inadequate  to  keep  pace 
with  this  increase  in  expenses,  and,  ac- 
cordingly, that  the  money  expended  in 
procuring   necessary  facilities  has  earned 

iv 


an  utterly  inadequate  return  since  1  !»<):;. 
and  no  return  at  all  since  1910 . 

''(h)  The  effect  of  these  things  is  that 
;ii  .1  time  when  the  husiness  of  these  car- 
riers is  larger  in  volume  than  ever  before 
in  their  history,  at  a  time  when  their  capi- 
tal obligations  are  the  largest  ever  re- 
corded and  their  plant  and  equipment 
more  complete  and  more  efficient  than 
ever  before,  they  find  themselves  face  to 
face  with  a  declining  net  income.  They 
are,  moreover,  now  without  the  potenti- 
ality of  further  operating  economies,  such 
as  they  have  been  able  thus  'far  to  put  into 
effect,  and  which  have,  until  but  recently, 
held  in  check  the  forces  beyond  their  con- 
trol, and  these  are  now  operating  in  full 
strength  to  diminish  profits.  The  situa- 
tion disclosed  in  the  figures  for  1913 
which  are  before  the  Commission  is  seri- 
ous, hut  a  truer  reflection  of  the  actual 
facts  is  found  in  the  figures  so  far  avail- 
able for  1911,  for  it  is  only  now  that  the 
full  effect  of  the  factors  operating  to  di- 
minish the  carriers'  profits  is  beginning  to 
appear. 

"In  brief  it  appears  (as  Mr.  Willard 
said  in  his  opening  statement)  that  'the 
new  capital  invested  in  railroads  in  Offi- 
cial Classification  Territory,  during  the 
last  three  years,  has  earned  little  or  no  re- 
turn ;  in  fact,  these  properties  generally 
are  actually  earning  less  net,  after  paying 
operating  expenses,  and  taxes,  than  they 
were  earning  at  the  beginning  of  the  pe- 
riod, and  before  the  $659,862,000  had  been 
spent. 

"  'The  result,  as  might  be  expected,  of 
this  constant  tendency  toward  diminishing 


net  returns,  has  been  to  seriously  check,  if 
not  altogether  stop,  the  normal  develop- 
ment of  railroad  facilities,  in  the  territory 
affected.  During  the  ten-year  period  these 
railroads  found  it  necessary  to  increase 
their  property  investment  approximately 
$2;000,000,000  an  average  of  about  $200,- 
000,000  per  annum,  and  it  is  certain  that 
an  equal,  if  not  greater  amount  per  an- 
num will  be  necessary  to  meet  the  require- 
ments of  the  future. 

"  'It  is  a  mistake  to  think  that  the  prob- 
lem is  merely  a  question  of  dividends  to 
railroad  stockholders,  although  that  fea- 
ture is  of  course. involved.  The  problem 
in  a  broad  and  true  sense  affects  all  inter- 
ests, and  the  outcome  of  this  particular 
ease — whichever  way  it  is  decided — will 
mark  an  epoch,  because  it  will,  in  effect, 
very  hugely  determine  whether  we  shall 
as  in  the  past  continue  to  look  to  private 
capital  and  private  enterprise  for  our 
transportation  requirements,  or  be  com- 
pelled finally  to  accept  the  only  alterna- 
tive' possible.  It  is  recognized,  of  course, 
that  railroad  expansion  and  improvements 
must  go  on,  and  any  tendency  or  condi- 
tion that  threatens  to  seriously  check,  if 
not  completely  stop  such  expansion  in  a 
large  and  important  part  of  the  United 
States,  becomes,  because  of  that  fact,  a 
matter  of  vital  importance.' 

"The  interest  of  the  public  in  the  situa- 
lion  has  nowhere  been  more  clearly  stated 
titan  in  the  1910  case,  where  the  Commis- 
sion said  : 

"  'Our  railroads  must  be  maintained  in 
a  high  state  of  efficiency.  This  the  public 
interests  demands.  Commerce  and  indus- 
try cannot  afford  to  wait  on  transportation 

vi 


facilities.  Our  rates  should  be  such  as  to 
render  possible  a  high-class,  not  an  ex- 
travagant, service. 

"it  is  generally  conceded  that  within 
the  next  few  years,  if  our  means  for  trans- 
portation by  rail  are  to  keep  pace  with  the 
calls  upon  them,  very  large  sums  must  be 
expended  in  the  way  of  new  construction 
and  new  equipment.  While  some  small 
portion  of  this  may  come  from  current 
earnings,  the  great  bulk  must  be  new  cap- 
ital and  this  capital  must  be  obtained  from 
the  investing  public. 

••  if,  therefore,  we  are  to  rely  in  the  fu- 
ture, as  we  have  in  the  past,  upon  private 
enterprise  and  private  capital  for  our  rail- 
way transportation,  the  return  must  be 
such  as  will  induce  the  investment.  It  is 
therefore  not  only  a  matter  of  justice,  but 
in  the  truest  public  interest,  that  an  ade- 
quate return  should  be  allowed  upon  rail- 
way capital.'  "  . 

In  reference  to  the  difficulties  encoun- 
tered by  the  railroads  in  obtaining  new 
capital,  the  brief  says  in  part: 

"Kailroad  companies  have  experienced 
(instantly  increasing  difficulty  in  recent 
years  in  securing  necessary  new  capital. 

"There  has  been  a  general  increase  in 
the  interest  return  demanded  of  invest- 
ment securities  and  at  the  same  time  the 
railroads  have  been  forced  to  meet  a  great, 
world-wide  and  strenuous  competition  for 
the  use  of  capital. 

"One  of  the  principal  causes  for  the  im- 
paired ability  of  the  railroads  to  obtain 
new  capital  is  that  their  property  invest- 
ment is  increasing  in  a  greater  ratio  than 
their  net  operating  revenue  and  that  their 
inability  to  increase  their  rates  to  meet  in- 


creased  expenses  has  made  them  no  longer 
responsive  to  the  law  of  increasing  re- 
turns. 

"Unless  the  railroads  are  permitted  to 
increase  their  revenues  by  a  reasonable  in- 
crease in  their  rates  for  transportation 
services  so  as  to  help  meet  the  large  and 
permanent  increases  in  the  cost  of  capital. 
wages,  taxes  and  other  expenses,  then  it 
will  be  only  a  question  of  time  when  there 
will  result  not  merely  the  reduction  or 
suspension  of  dividends,  but  also  in  some 
cases  at  least  a  default  in  the  payment  of 
interest  and  other  obligations. 

"Unless  the  railroads  are  able  to  re- 
ceive rates  for  their  transportation  serv- 
ices that  will  produce  net  revenues  suffi- 
cient to  meet  reasonable  dividend  require- 
ments and  leave  a  reasonable  surplus  as  a 
margin  of  safety  to  help  defray  the  'cost 
of  progress,'  secure  the  future  stability  of 
rates,  establish  confidence  in  the  continu- 
ance of  dividends  and  otherwise  maintain 
credit,  there  is  but  little  ground  to  believe 
that  private  investors  will  afford  the 
necessary  new  capital. 

"Diminished  surplus  earnings  prevent 
the  creation  of  adequate  reserve  funds  un- 
less dividends  be  curtailed  or  suspended. 
Curtailments  of  dividends  would  aggra- 
vate the  situation,  while  suspension  of 
dividends  would  make  it  increasingly  dif- 
ficult to  obtain  any  capital  even  by  the 
sale  of  bonds,  and  where  obtainable  by 
bond  sales  it  would  only  be  at  much  higher 
rates  of  interest.  Total  suspension  of 
dividends  by  all  the  railroads,  though  it 
would  produce  a  great  panic,  would  not 
produce  the  amount  of  new  capital  re- 
'|lli^ed.,, 


3U  LLETI  N    B 


The  Case  for  Increased  Railroad  Rates 


Why  the  Carriers  Seek  a 
General  Rate  Advance 

April  28,  1914. 

The  railroads  seeking  a  general  in- 
crease of  5  per  cent,  in  freight  rates  have 
just  filed  with  the  Interstate  Commerce 
Commission  a  memorandum  as  to  why  the 
railroads  seek  a  general  rate  advance. 
The  memorandum  says : 

"To  meet  the  need  for  increased  net 
revenues,  three  methods  were  looked  upon 
as  possibilities : 

"(1)  A  large  reduction  in  the  cost  of 
operation,  other  conditions  remaining  as 
at  present,  would  produce  larger  net  earn- 
ings; 

"(2)  A  large  increase  in  gross  earnings 
if  the  additional  business  could  be  handled 
with  the  present  facilities  and  at  present 
operating  ratios  would  also  result  in  a 
larger  net; 

"(3)  An  increase  in  freight  charges, 
other  conditions  remaining  as  at  present, 
would  bring  about  the  same  result.  The 
process  of  reasoning  by  which  two  of  these 
possibilities  were  eliminated  may  be  best 
stated  in  the  language  of  Mr.  Willard : 

"I  do  not  believe  it  will  be  possible 
to  obtain  the  necessary  relief  either 
i>y  reducing  wages  already  in  effect, 
or  by  making  any  very  considerable 
reduction  in  the  number  of  men  em- 
I  -loyed;  nor  do  I  believe  it  will  be 
possible  to  effect  economies  in  opera- 
tion of  sufficient  magnitude  to  have 
any  saving  effect  upon  the  situation. 
Undoubtedly  further  economies  will  be 
brought  about,  but  it  is  altogether 
likely  that  in  the  future,  as  in  the 
.  they  will  be  more  than  offset  1  y 
increased  taxes,  by  the  effect  of  fur- 
ther   legislation,   which   is  almost   cer- 

ix 


tain  to  come  about,  and  by  other  un- 
avoidable increases  in  expenses. 

"Under  certain  conditions  it  might 
properly  be  expected  that  larger  gross 
earnings  would-  give  increased  net, 
but  it  so  happens  that  the  railroads 
involved  in  this  proceeding  are  located 
in  that  part  of  the  United  States 
where  commercial  and  industrial  de- 
velopment has  been  most  intense,  and 
it  will  be  shown  that  in  order  to  in- 
crease the  gross  earnings  of  these  par- 
ticular companies  to  any  great  extent 
at  the  existing  rates,  it  would  be  nec- 
essary for  them  to  handle  a  volume  of 
business  much  beyond  their  present 
carrying  capacity. 

"It  would,  therefore,  be  necessary 
to  obtain  and  spend  a  large  amount 
of  new  capital  for  increased  facilities 
before  gross  earnings  could  be  greatly 
augmented,  and  as  has  already  been 
shown,  new  capital  invested  in  such 
facilities  during  the  last  three  years 
has  generally  failed  to  earn  any  re- 
turn whatever  upon  the  investment. 

"For  this  reason  I  do  not  think  we 
can  safely  look  for  relief  in  the  one 
direction  of  increased  gross  earnings, 
and  this  brings  us  to  the  third  remain- 
ing method  suggested — that  is,  in- 
creased charges,  or  increased  rates  and 
fares. 

"Inasmuch  as  the  passenger  fares 
charged  by  these  several  companies  are 
generally  the  result  of  legislative  en- 
actments, and  the  mail  pay  and  ex- 
press rates  are  also  beyond  the  control 
of  the  railroads,  it  will  be  seen  at  once 
that  no  immediate  relief,  and  perhaps 
no  very  considerable  relief  at  any  time, 
can  be  obtained  in  these  directions, 
and  we  are  consequently  forced  to  con- 
sider an  advance  in  freight  rates  as 
the  one  available  source  of  increased 
earnings." 

"In  the  opinion  in  Docket  No.  3400  at 
p.  1G  the  Commission  noted  the  fact  that 
in  Official  Classification  Territory  espe- 
cially the  existing  fabric  of  freight  rates 
is  the  product  of  most  active  competition, 
recognizing  the  principle  that  'there  is  a 


strong  presumption  that  rates  so  arrived 
at  are  reasonable  rates.' 

"Having  before  them,  therefore,  a 
fabric  of  freight  rates  presumed  to  be  rea- 
sonable and  non-discriminatory,  and  hav- 
ing reached  the  conclusion  that  the  only 
practicable  method  of  augmenting  net 
revenues  was  by  an  increase  in  the  rates 
therein  contained,  it  appeared  to  the  car- 
riers to  be  obvious  that  the  fair  method 
of  effecting  the  increase,  having  regard  to 
the  interests  of  the  shippers,  was  to  lift 
the  entire  fabric  into  a  higher  plane  by 
means  of  what  may  be  called  a  horizontal 
increase,  thereby  preserving  in  support 
of  the  increased  rates  the  presumption  in 
favor  of  their  non-discriminatory  charac- 
ter, and  leaving  open  as  the  sole  question 
to  be  determined  before  permitting  the 
rates  to  go  into  effect  whether  the  need 
for  increased  net  revenues  justifies  the  ex- 
tent to  which  the  entire  fabric  has  been 
raised. 


"In  anticipation  of  a  possible  conclu- 
sion by  the  Commission  to  the  effect  that 
present  rates  do  not  afford  adequate  rev- 
enue to  the  carriers,  and  having  regard  to 
the  second  question  referred  to  by  the 
Commission  in  its  inquiry  under  Docket 
No.  5860,  it  has  been  suggested  that  the 
revenue  of  the  carriers  under  present 
tariffs  and  practices  suffers  important  de- 
pletion from  the  performance  by  the  car- 
riers of  certain  services  as  incident  to  the 
transportation  of  freight  without  any 
charge  in  addition  to  the  transportation 
rate,  when  in  fact  such  services  should 

xi 


more  properly  be  held  to  be  in  addition  to 
the  transportation  service  covered  by  the 
published  rate  and  should  be  made  the 
subject  of  additional  charges. 

"In  its  decision  in  the  so-called  Indus- 
trial Railways  Case,  Docket  No.  4181,  at 
p.  217,  the  Commission  said  that 

"the  very  carriers  that  are  augment- 
ing their  expense  accounts  and  dissi- 
pating their  revenues  in  this  manner 
(by  paying  allowances  to  industrial 
railways)  to  the  extent  of  many  mil- 
lions of  dollars  a  year,  and  for  the 
benefit  of  a  comparatively  few  ship- 
pers, are  now  complaining  that  their 
present  earnings  are  insufficient  and 
on  that  ground  have  asked  our  per- 
mission to  make  a  substantial  increase 
in  their  general  rate  schedules. 

"In  this  general  connection  it  may 
safely  be  assumed  that  no  substantial 
part  of  the  well-informed  and  reflect- 
ing public  would  deny  to  the  owners  of 
the  railroads  of  the  country  a  reason- 
able return  on  their  investments; 
nevertheless,  before  they  may  fairly 
ask  the  general  public  to  share  fur- 
ther in  carrying  their  burdens  it  is 
manifest  that  the  railroads  must  them- 
selves properly  conserve  their  sources 
of  revenue  by  making  every  service 
rendered  by  them  contribute  reason- 
ably to  their  earnings." 

"Following  the  decision  just  referred 
to,  notwithstanding  the  fact  that  no  order 
was  made,  the  carriers  in  this  territory  at- 
tempted in  good  faith  to  comply  with  the 
views  of  the  Commission  in  respect  to  in- 
dustrial allowances.  Tariffs  were  filed 
with  this  Commission  and  with  the  vari- 
ous State  Commissions  cancelling  allow- 
ances to  one  hundred  and  nine  so-called 
industrial  railways,  only  thirty  of  which 
were  specifically  dealt  with  by  the  Com- 
mission in  its  opinion. 


xn 


"Many  persons  affected  by  these  can- 
cellations felt  themselves  aggrieved,  and 
sought,  through  the  medium  of  the  vari- 
ous State  Commissions,  to  prevent  the 
tariffs  from  going  into  effect,  to  the  full 
extent  contemplated  by  the  decision  of 
this  Commission. 

"Proceedings  were  instituted  before  the 
Public  Service  Commissions  of  New  York, 
Illinois,  Indiana  and  Ohio,  and  protests 
were  filed  with  this  Commission,  with  the 
result  that  the  tariffs  providing  for  can- 
cellations of  allowances  to  twenty  of  the 
seventy-nine  roads  not  mentioned  by  the 
Commission  in  Docket  No.  4181  were  by 
this  Commission  suspended. 

"It  thus  appears  that  the  reform  recom- 
mended in  docket  No.  4181,  estimated  to  be 
worth  $15,000,000  a  year,  has  failed  of  its 
immediate  purpose,  and  it  is  apparent  that 
it  can  only  be  made  effective  in  aid  of  in- 
adequate revenue  by  overcoming  many 
obstacles  which  those  controlling  the  in- 
dustrial railways  will  be  able  to  interpose. 

"We  understand  that  these  subjects 
[spotting,  etc.]  are  not  on  the  docket  for 
discussion  in  this  brief,  and  that  further 
investigation  thereof  will  be  made.  With 
such  further  investigation  the  carriers 
sympathize,  and  if  at  the  end  of  such  in- 
vestigation some  way  is  found  by  which 
additional  revenues  may  be  secured  for 
the  so-called  'volunteered  services'  such 
additional  revenue  will  doubtless  be  wel- 
come. 

"The  matters  are  referred  to  here 
merely  to  call  attention  to  what  appears 
to  be  the  obvious  fact  that  if  the  Com- 


mission  shall  be  of  opinion  that  the  car- 
riers are  in  immediate  need  of  additional 
net  revenue,  it  is  not  at  all  likely  that 
such  additional  net  revenue  in  any  ade- 
quate amount  can  be  immediately  secured 
by  the  adoption  of  any  of  the  reforms 
which  have  been  suggested." 


xiv 


The  Case  for  Increased  Railroad  Rates 

The  Need  of  the  Carriers  for 
Additional  Revenue 

Washington,  April  27. 

In  opening  the  oral  argument  in  the 
application  of  the  eastern  railroads  for  an 
increase  in  freight  rates,  Mr.  Geo.  Stuart 
Patterson,  General  Solicitor  of  the  Penn- 
sylvania Railroad,  addressed  the  Inter- 
state Commerce  Commission  to-day  on 
"The  Need  of  the  Carriers  for  Additional 
Revenue." 

Mr.  Patterson  said  in  substance : 

"During  the  past  ten  years,  for  the 
thirty-five  railroad  systems  in  this  pro- 
ceeding— 

"Property  investment  has  increased 
-16.04  per  cent.; 

"Capital  obligations  have  increased 
49.23  per  cent.; 

"Operating  revenues  have  increased 
63.54  per  cent.; 

"Operating  expenses  have  increased 
74.80  per  cent.,  and 

"Taxes  have  increased  111.43  per  cent. 

"During  this  same  period,  1903-1913, 
there  lias  been — 

"(a)  A  decline  in  the  ratio  of  net  op- 
erating income  to  property  investment; 

"(b)  A  decline  in  the  ratio  of  net  op- 
erating income  (plus  interest  on  funded 
debt)  to  total  capital  obligations; 

"(c)  A  decline  in  the  ratio  of  surplus 
to  total  capital  obligations. 

"AH  of  this  shows  a  decided  weakening 
in  the  position  of  the  carriers  as  regards 
iheir  return  on  investment,  despite  the 
growth   in   the  size  of  the  plant,  volume 

xv 


and  density  of  the  business,  and  the  facili- 
ties  and  improved  methods  of  handling 
that  business. 


"Thus  during  the  last  ten  years  the  car- 
riers find  themselves,  after  a  period  of 
great  growth  and  expenditure  of  new  cap- 
ital, worse  off  than  they  were  before  this 
growth  and  expenditure,  though  they 
should  be  materially  better  off. 

"The  importance  of  this  showing  for 
the  period  1903  to  1913  is  greatly  in- 
creased by  the  fact  that  the  tendencies 
which  operated  during  that  period  to  de- 
crease the  return  on  the  investment  are 
operating  with  even  greater  force  in  the 
last  three  years. 

"The  figures  reflect  an  acceleration  in 
the  rate  of  decline  in  recent  years.  Thev 
show  the  lowest  rate  of  return,  and  the 
lowest  surplus  in  the  last  three  years,  and 
the  year  1913  shows  the  lowest  figure  for 
any  of  these  years.  If  it  be  remembered 
that  these  three  years  are  the  biggest 
three-year  period  in  the  carriers'  history, 
and  that  1913  was  in  itself  the  largest  of 
the  three,  then  the  full  significance  of  the 
showing  becomes  apparent. 

"The  view  has  been  suggested  that  the 
net  revenues  for  1913  were  larger  than 
for  any  of  the  last  five  years,  except  1910, 
and,  therefore,  negative  any  inference 
that  the  carriers'  revenues  are  inadequate 
or  that  they  have  reached  a  crisis  in  their 
affairs. 

"In  1913  not  only  were  the  facilities 
the  largest  in  the  history  of  these  carriers, 
but  the  use  of  them  was  the  greatest,  and 
practically  to  their  full  capacity. 

xvi 


"To  justify  the  outlay  required  to  pro- 
vide the  facilities,  the  net  revenues  re- 
sulting from  such  use  should  have  ex- 
ceeded those  of  any  prior  year — should 
have  been  sufficient  not  only  to  pay  the 
charges  on  the  additional  property  in- 
vestment for  a  year  such  as  1913,  but  to 
provide  money  to  pay  those  charges  dur- 
ing lean  years,  e.  g.,  1914,  when  the  fa- 
cilities are  not  fully  used. 

"The  year  1910  is  that  of  the  preceding 
five  years  wherein  the  then  facilities  of 
the  carriers  were  fully  used,  and  is,  there- 
fore, the  year  properly  comparable  with 
1913. 

'"When  a  comparison  of  1913  with  1910 
shows  that,  despite  the  expenditure  of 
over  $659,000,000  on  property  and  an  in- 
creased use  yielding  $186,775,000  in- 
creased operating  revenues,  the  net  oper- 
ating income  decreased  $16,311,000;  then, 
that  comparison,  the  carriers  urge,  does 
prove  the  inadequacy  of  their  revenues 
and  that  the  results  so  shown  are  not  such 
as  to  fairly  justify  the  expenditure  of 
additional  capital  for  the  further  pro- 
vision of  similar  facilities. 


"It  is  an  absolutely  new  thing  in  the 
history  of  American  railroading  for  a  year 
like  1913,  or  a  period  like  1910-1913, 
when  traffic  was  the  largest  ever  recorded 
for  a  similar  period  of  time,  to  show  the 
position  of  the  owners  of  the  property  to 
be  worse  off  than  any  previous  years  or 
periods. 

"It  is   strong  and   conclusive   evidence 


that  some  change  has  taken  place  in  con- 
ditions, nor  is  it  difficult  to  see  what  this 
change  is,  and  what  has  brought  it  about. 
It  will  be  disclosed  by  the  collateral  lines 
of  inquiry;  namely,  increased  cost  of  op- 
eration, and  increased  cost  and  difficulty 
of  securing  new  capital. 

"There  has  been  a  steady  increase  in 
transportation,  maintenance  of  way  and 
maintenance  of  equipment  expenses, 
which  are  continuing  in  character,  and 
the  full  effect  of  which  is  just  beginning 
to  be  felt. 

"Operating  revenues  are  inadequate  to 
keep  pace  with  the  expenses,  and  accord- 
ingly the  money  expended  in  procuring 
facilities  has  earned  an  inadequate  return 
since  1903,  and  no  return  since  1910. 

"The  effect  of  these  things  is  that  at  a 
time  when  the  business  of  the  carriers  is 
largest  in  volume,  and  at  a  time  when 
their  investments  and  capital  obligations 
are  the  largest,  and  their  plant  and  equip- 
ment more  complete  and  efficient,  the  car- 
riers find  themselves  face  to  face  with  a 
declining  net  operating  income. 

"The  result  of  this  tendency  toward 
diminishing  net  returns  will  be  to  check, 
if  not  altogether  6top,  the  normal  devel- 
opment of  railroad  facilities  in  this  terri- 
tory. In  the  last  ten  years  they  have 
been  forced  to  spend  $200,000,000  a  year, 
and  an  equal,  if  not  a  greater,  amount 
will  be  necessary  for  the  future  if  the 
railroads  are  to  properly  handle  the  busi- 
ness of  the  country. 

"The  question  is  one  not  merely  of  rail- 
road dividends,  though  that  is  a  question 

xviii 


of  vital  importance,  but  one  of  the  inter- 
ests of  the  general  public  in  seeing  that 
the  railroads  are  maintained  in  a  high 
state  of  efficiency,  for,  as  Mr.  Prouty  said 
in  the  1910  case: 

"  'If,  therefore,  we  are  to  rely  in  the 
future  as  we  have  in  the  past  upon  pri- 
vate enterprise  and  private  capital  for  our 
railway  transportation,  the  return  must 
be  such  as  will  induce  the  investment.  It 
is,  therefore,  not  only  a  matter  of  justice, 
but  in  the  truest  public  interest  that  an 
adequate  return  should  be  allowed  upon 
railway  capital.' " 


xix 


The  Case  for  Increased  Railroad  Rates 


The  Economic  Justification 

for  An  Increase  in 

Freight  Rates 

Washington,  April  28. 

Oral  argument  that  fundamental  eco- 
nomic and  financial  conditions  justify  an 
increase  in  freight  rates  was  offered  the 
Interstate  Commerce  Commission  to-day 
by  Mr.  Geo.  F.  Brownell,  vice-president 
of  the  Erie  Railroad.  Mr.  Brownell  said 
in  substance: 

"If  operating  expenses  and  the  new  bur- 
dens imposed  by  law  upon  the  railroads 
had  not  been  enormously  increased,  they 
would  now  be  in  a  highly  prosperous  con- 
dition, but  it  is  the  net  income  and  not 
the  gross  that  counts,  and  the  adequacy  of 
the  net  must  be  considered  in  connection 
with  the  amount  of  capital  employed  in 
the  work  and  the  aggregate  amount  of 
transportation  service  performed. 

"The  railroad  industry  is  the  nation's 
greatest  industry,  save  only  that  of  agri- 
culture. In  it  is  invested  more  than  a 
tenth  of  the  nation's  wealth,  and  it  gives 
direct  employment,  under  normal  condi- 
tions, to  nearly  two  millions  of  the  coun- 
try's most  intelligent  and  efficient  work- 
ers, and  indirectly  to  many  more. 

"But,  except  for  its  magnitude,  it  is  in 
most  respects  like  other  industries.  It 
provides  transportation,  which  is  all  that 
it  has  to  sell.  Its  prosperity  and  its  abil- 
ity to  properly  and  adequately  perform  its 
important  functions  for  the  public  depend 
upon  its  ability  to  charge  such  reasonably 
adequate  transportation  rates  as  will  yield 

xx 


fair  compensation  for  the  service,  includ- 
ing a  fair  return  upon  the  capital  em- 
ployed and  one  that  will  make  the  invest- 
ment of  new  capital  attractive  to  in- 
vestors. 

"Until  recent  years  it  was,  like  other 
industries,  responsive  to  the  law  of  in- 
creasing returns,  under  which  an  increase 
in  the  volume  of  traffic  would  produce  a 
decrease  in  the  unit  of  cost,  and  operating 
revenues  would  increase  more  rapidly 
than  would  operating  expenses.  In  those 
early  years,  like  other  industries,  it  was 
able  to  control  its  expenditures  and  in- 
crease its  charges  to  meet  changed  condi- 
tions. 

"All  this  has  changed.  It  has  lost  in 
large  measure  its  ability  to  control  its 
expenditures.  Because  of  its  quasi  public 
character  it  is  subject  to  governmental 
regulations  and  control  to  much  greater 
extent  than  most  other  industries.  It  has 
been  subjected  to  numerous  requirements 
of  legislatures  and  regulatory  bodies,  both 
Federal  and  State,  which  have  increased 
greatly  its  operating  and  its  capital  ex- 
penditures. Many  additional  legislative 
requirements  of  this  character  are  in  vari- 
ous stages  of  incubation. 

"The  railroads  are  not  here  questioning 
the  wisdom  or  expediency  of  these  require- 
ments, and  will  continue  to  the  best  of 
their  ability  to  bear  and  sustain  the  finan- 
cial burdens  they  impose;  but  they  ask 
that  they  be  not  deprived  of  strength  to 
accomplish  the  task — and  remunerative 
rates  are  the  very  sinews  of  that  strength. 

"The  railroad  industry  has  ceased  re- 

xxi 


sponding  to  that  economic  law;  it  has 
been  forced  to  become  an  industry  of  de- 
creasing returns.  The  increase  in  ex- 
penses and  other  burdens  has  also  absorbed 
the  savings  from  increased  efficiency  and 
from  the  investment  of  new  capital.  It  is 
fast  reducing  net  operating  income  to  a 
point  less  than  in  previous  years,  when 
the  business  handled  and  the  investment 
of  capital  were  much  less;  and  the  pros- 
pect is  that,  upon  the.  basis  of  existing 
freight  rates,  the  rate  of  net  return  will 
continue  to  diminish,  notwithstanding 
any  further  increase  in  the  volume  of  busi- 
ness handled  and  in  property  investment. 

"The  irresistible  processes  of  economic 
forces  have  reduced  the  money  or  pur- 
chasing value  of  railroad  rates  more  than 
a  third  in  the  last  fifteen  years,  more  than 
15  per  cent,  since  1903,  and  nearly  10  per 
cent,  since  1908.  The  railroads  have  been 
compelled  to  accept  pay  for  their  services 
in  currency  which  in  fact,  though  not  in 
form,  has  depreciated,  and  the  reduction 
in  their  real  compensation  is  quite  as  ef- 
fective, if  it  is  not  so  apparent,  as  though 
the  nominal  rates  had  been  reduced  but 
made  payable  in  dollars  of  their  former 
value. 

"Efforts  at  readjustment  to  meet  these 
new  conditions  have  long  been  in  evidence 
on  every  hand.  Labor  and  capital  require 
and  secure  higher  rates  than  heretofore. 
Other  industries  have  increased  selling 
prices  of  their  products,  but  in  the  rail- 
road industry  this  readjustment  has  taken 
place  only  with  respect  to  the  railroad 
companies'  expenditures  for  wages,  mate- 

xxii 


rials,  interest,  etc.,  but  not  with  respect 
to  the  railroads'  charges. 

"They  have  been  restricted  by  statute 
from  adapting  themselves  like  other  in- 
dustries to  the  new  economic  and  mone- 
tary conditions.  They  are  still  required 
to  sell  their  services  at  rates  of  pay  even 
less  than  those  established  years  ago,  after 
competition  had  forced  them  to  a  low 
level,  and  to  take  their  pay  in  a  depreci- 
ated currency,  while  they  must  buy  their 
labor,  buy  their  materials,  borrow  their 
capital  and  pay  their  taxes  on  the  basis  of 
present-day  commodity  prices. 

"Why  should  not  they  be  given  permis- 
sion to  adopt  their  rates  to  these  general 
economic  changes  just  as  the  wage-earner 
or  merchant,  operating  in  a  free  market, 
without  restraints  of  legislation  limiting 
his  power  to  fix  his  charges  or  prices,  has 
been  able  to  secure  an  adjustment  of  his 
charges  or  prices? 

"The  forces  bringing  about  the  rise  of 
prices  will  necessarily  lead  to  a  rise  of 
railway  rates — or  lead  to  railroad  bank- 
ruptcy. 

"The  railroad  companies  have  experi- 
enced constantly  increasing  difficulty  in 
recent  years  in  securing  necessary  new 
capital ;  and  where  they  are  able  to  mar- 
ket new  securities  for  that  purpose,  they 
are  unable  to  do  so  except  at  substantially 
lower  prices  or  upon  substantially  higher 
interest  bases.  There  has  been  during  re- 
cent years  a  general,  a  substantial  and  a 
world-wide  rise  in  interest  rates. 
*     *     *     * 

"The  rates  of  interest  yielded  by  under- 
xxiii 


lying  and  well-secured  outstanding  rail- 
road bonds  at  the  present  prices  do  not 
measure  the  price  which  railroad  compa- 
nies have  to  pay  to-day  to  secure  new 
capital.  The  competitive  position  in  the 
struggle  to  obtain  new  capital  out  of  the 
general  investment  fund  has  been  im- 
paired by  a  number  of  causes  specially  ap- 
plicable to  them. 

"It  is  not  an  abstract  question  as  to 
whether  railroad  credit  generally  has  de- 
teriorated as  compared  with  other  forms 
of  credit.  It  is  a  practical  question 
whether  the  kind  of  credit  these  railroads 
now  have  available  has  deteriorated  as 
compared  with  their  available  credit  in 
former  years,  by  reason  of  factors  beyond 
their  control. 

"They  no  longer  are  able  to  offer  prior 
lien  obligations.  They  are  no  longer  able 
to  dispose  of  capital  stock.  They  are 
therefore  compelled  to  offer  junior  securi- 
ties which  can  be  marketed  only  at  lower 
prices  and  upon  higher  interest  bases. 
Because  of  the  existence  of  conditions  un- 
favorable to  the  borrower,  short-time  notes 
have  become  an  important  factor  in  the 
investment  market. 

"Recently  many  companies  have  found 
that,  owing  to  the  conditions  in  the  money 
market,  it  was  not  practicable  for  them  to 
dispose  of  long-term  bonds,  and  that 
financing  by  means  of  short-term  notes 
presented  the  only  practicable  and  avail- 
able means  of  meeting  their  immediate 
necessities,  affording  as  they  do  a  rela- 
tively high  rate  of  interest  yield  and  gen- 
erally being  specially  secured  by  collateral. 

"An  added  cause  of  the  decline  in  rail- 
road credit  is  the  increasing  uncertainty 
xxiv 


of  the  financial  results  of  railroad  opera- 
tions and  the  risk  attending  railroad  in- 
vestments. 

*     *     *     * 

"If  the  railroads  are  not  allowed  to 
charge  such  rates  for  their  services  as  will 
produce  the  proper  return  upon  the  money 
invested,  then  how  long  will  those  re- 
sponsible for  the  management  of  these 
properties  be  justified  in  continuing  these 
expenditures  of  new  capital,  even  if  it 
should  be  available  at  reasonable  rates  of 
interest  ? 

"How  about  their  duty  to  their  share- 
holders and  those  whom  they  have  induced 
to  purchase  their  securities?  Must  not 
that  duty  be  considered  as  well  as  their 
desire  to  furnish  better  and  additional 
transportation  facilities  for  the  use  of  the 
public?  How  long  can  they  be  expected 
to  incur  additional  fixed  or  dividend 
charges  through  the  continuance  of  ex- 
penditures that  have  proven  to  be  unre- 
munerative  in  the  past  and  that  in  the 
judgment  of  the  managers  will  continue 
to  be  unremunerative  in  the  future,  unless 
freight  rates  be  advanced  ? 

"Unless  the  railroads  are  permitted  to 
increase  their  revenues  by  a  reasonable  in- 
crease in  their  rates  for  transportation 
services  so  as  to  meet  the  large  and  per- 
manent increases  in  the  cost  of  capital, 
wages,  taxes  and  other  expenses,  then  it 
will  only  be  a  question  of  time  when  there 
will  result  not  merely  the  reduction  and 
suspension  of  dividends,  but  also,  in  some 
it  Least,  I  default  in  the  payment  of 
interest  and  other  obligations. 


"Now,  when  the  need  for  capital  is 
greater  than  ever,  the  ability  to  secure  it 
rests  more  largely  than  ever  upon  the  abil- 
ity of  the  railroads  to  satisfy  investors 
that  they  will  be  able  to  increase  their  net 
earnings.  The  great  bulk  of  this  new  cap- 
ital must  be  obtained  from  private  invest- 
ors. Increasingly  less  amounts  can  be  ob- 
tained from  surplus  earnings. 

"Being  practically  limited  to  the  issue 
of  junior  securities,  the  physical  property 
or  securities  they  can  pledge  as  security 
for  the  new  issues  are  subject  to  various 
prior  liens.  Consequently  the  principal 
basis  of  the  market  value  of  the  bonds 
and  other  corporate  obligations  which 
these  carriers  can  now  issue,  as  well  as  of 
their  capital  stock,  is  the  income  produc- 
ing ability  of  the  railroad.  The  rapidly 
diminishing  price  which  can  be  realized 
for  their  bonds  other  than  those  that  are 
underlying  and  well  secured,  and  for  their 
stocks,  bear  eloquent  testimony  as  to  the 
impairment  in  their  net  income  producing 
ability  which  has  already  occurred  and 
that  which  investors  regard  as  a  serious 
risk  in  the  future. 

"Unless  the  railroads  are  able  to  receive 
rates  for  their  transportation  services  that 
will  produce  net  revenues  sufficient  to 
meet  reasonable  dividend  requirements 
and  leave  a  reasonable  surplus  as  a  margin 
of  safety  to  help  defray  the  'cost  of  prog- 
ress,' secure  the  future  stability  of  rates, 
establish  confidence  in  the  continuance  of 
dividends  and  otherwise  maintain  credit, 
there  is  but  little  ground  to  believe  that 
private  investors  will  afford  the  necessary 
new  capital." 


XXVI 


.LET  IN     E 


The  Case  for  Increased  Railroad  Rates 


The  Nation's  Policy 

to  Encourage  Investment 

in  Railroad  Properties 

Washington,  April  28,  1914. 

Speaking  on  behalf  of  railroads  in  the 
Central  Freight  Association  territory,  Mr. 
J.  L.  Minnis,  General  Counsel  for  the  Wa- 
bash Railroad,  to-day  presented  to  the  In- 
terstate Commerce  Commission  a  special 
argument  in  reference  to  the  meaning  and 
purpose  of  our  national  laws  regulating 
railroads.     Mr.  Minnis  said  in  substance: 

"Transportation  by  railroad  in  a  coun- 
try of  great  area  like  ours  is  a  public 
necessity  vital  to  every  citizen,  and  there- 
fore a  facility  which  the  Government  is 
bound  to  afford  for  the  use  of  the  people. 
The  Government  may  afford  it  either  by 
owning  and  operating  the  railroads  as  a 
Government  instrumentality,  or  by  au- 
thorizing and  encouraging  its  citizens,  by 
the  inducement  of  private  gain,  to  own 
and  operate  them. 

"At  the  beginning  of  the  railroad  era, 
Government  ownership  was,  according  to 
tradition,  thought  not  only  unwise,  but  in- 
compatible with  the  permanency  of  our 
free  institutions,  in  that  it  would  place  in 
the  hands  of  the  Executive  Department 
the  expenditure  of  vast  sums  of  public 
money  and  the  power  to  appoint,  supervise 
and  discharge  the  vast  armies  of  organized 
men  necessary  to  the  conduct  of  the  rail- 
road business,  which  would  so  enlarge  the 


xxvn 


oil  ice  holding  class  as  to  greatly  diminish, 
if  it  would  not  in  time  destroy,  the  influ- 
ence of  the  people  generally  in  the  conduct 
of  the  Government. 

"The  Government,  including  the  States, 
accordingly  declared  its  public  policy  with 
respect  to  railroad  transportation  by  au- 
thorizing the  citizens,  whom  I  shall  call 
private  investors,  to  construct,  operate  and 
develop  the  railroads  of  the  country 
through  the  agency  of  corporations  or- 
ganized for  private  gain. 

"By  saying  the  Government  authorized 
and  encouraged  private  investors  to  con- 
struct, operate  and  develop  the  railroads 
for  private  gain,  I  mean  that  when  the 
Government  determined  to  rely  and  de- 
pend upon  private  investors  to  furnish  the 
money  necessary  for  so  great  an  undertak- 
ing involving  the  well-being  of  the  peo- 
ple, it  must  have  engaged  to  make  rail- 
road investments  attractive  as  the  founda- 
tion of  its  policy,  because  a  breach  of  that 
engagement  would  deprive  the  people  of 
transportation  or  necessitate  its  conduct  as 
a  Governmental  facility;  and  the  engage- 
ment must,  in  duration,  exist  as  long  as 
the  need  for  transportation  exists. 


"I  have  said  that  policy  was  to  foster 
and  promote  the  operation  and  develop- 
ment of  the  railroad  transportation  of  the 
country  by  means  of  private  capital, 
through  the  agency  of  private  companies. 
Xow,  what,  in  its  final  analysis,  did  that 
policy  embrace? 

"A  railroad  company  has  no  owners  in 
the  sense  that  ordinary  property  has  own- 

xxviii 


ers;  it  is  only  a  legal  fiction  or  agency  of 
the  private  investors  who  supply  it  with 
its  capital,  and  as  its  officers  act  under 
their  impulse,  we  may  say  that  the  legis- 
lative charters  gave  to  the  private  investors 
the  management,  through  the  companies, 
of  the  railroad  enterprises,  and  the  right 
to  fix,  in  their  discretion,  their  reasonable 
tolls  and  fares. 

"By  these  charters,  then,  the  Govern- 
ment and  the  States,  in  substance,  gave 
to  the  private  investors  the  authority  to 
construct  and  manage  the  railroads,  and 
left  them  free  to  make  as  much  money  as 
they  could  obtain  from  the  reasonable 
rates  and  fares  they  promulgated  in  their 
discretion. 

"But,  in  return  for  these  valuable 
grants,  the  private  investors  agreed,  in  the 
charters  of  the  companies,  to  operate  the 
railroads  as  public  carriers  for  reasonable 
rates  and  fares. 

*     *     *     * 

"The  policy,  then,  embraced  two  ele- 
ments— one  of  a  private  nature;  namely, 
that  the  private  investors  represented  by 
the  companies  should  have  the  right  to 
construct  and  manage  the  railroads,  and 
make  all  the  money  they  could  obtain 
from  the  reasonable  rates  and  fares  they 
(barged  for  transportation — and  the  other 
of  a  public  nature;  namely,  that  the  pri- 
vate investors  represented  by  the  -com- 
panies would  operate  the  railroads  as  pub- 
lic carriers. 

"The  policy  of  Congress  from  the  be- 
ginning was  to  rely  upon  competition  to 
prevent  excessive  rates,  and  it  was  no 
doubt  reasonable  to  assume  that  the  en- 

xxix 


forcement  of  the  salutatory  provisions  of 
the  Hepburn  Bill  would  confine  competi- 
tion to  its  natural  and  lawful  field.  In 
addition,  it  was  a  well-known  fact  that  the 
carriers  could  not,  without  acting  in  com- 
bination in  violation  of  the  anti-trust 
statute,  increase  their  rates  as  a  body.  Be- 
sides, the  Hepburn  Bill  provided  an  ef- 
fective means  from  preventing  them  from 
applying  excessive  individual  rates. 

"The  competitive  conditions  prevailing 
since  the  enactment  of  the  Hepburn  Act 
rendered  impossible  an  increase  in  the 
body  of  rates  of  the  companies,  except  pur- 
suant to  combination  which  was  forbidden 
by  law. 

"The  amendment  of  1910  has,  then, 
opened  up  a  way  for  the  companies  to 
lawfully  increase  the  body  of  their  rates, 
if  necessary  to  encourage  the  investment 
of  private  capital  in  their  railroads. 

"Thus  it  will  be  observed  that  the  Act 
to  Regulate  Commerce,  whether  viewed 
from  the  standpoint  of  the  Government  or 
the  investor  in  the  railroads,  was  designed 
to  foster  and  encourage  the  operation  and 
development  of  the  railroads  by  private 
capital. 

*     *     *     * 

"The  amendment  of  1910  invested  the 
Commission  with  power  to  veto  advanced 
rates  filed  by  the  companies  if  they  be 
unreasonable.  Now  what  is  meant  by  a 
reasonable  rate  in  that  amendment? 

"As  we  have  seen,  the  amendment  was 
enacted  to  promote  the  public  policy  of 
the  Government,  and  it  is  obvious  that  in 
construing  it  we  should  make  it  useful  in 

XXX 


carrying  out  that  policy ;  and  if  we  do  so 
we  find  that  the  policy  of  the  Government 
affords  a  definition  of  the  reasonable  rate 
referred  to  in  the  amendment,  and  it  is 
this  : 

"A  body  of  rates  which  will  produce 
sufficient  revenue  to  encourage  private  in- 
vestors to  supply  the  companies  with  the 
two  hundred  and  twentv-five  or  fiftv  mil- 
lion  dollars  per  annum  which  is  necessary 
for  their  development. 

"Such  a  rate  or  rates  were  contem- 
plated by  the  amendment,  because  their 
promulgation  is  essential  to  carry  out  the 
policy  of  the  Government.  Such  a  rate 
would  be  a  reasonable  rate  to  the  shipper, 
who  ought  not  expect  a  lower  rate  than 
is  necessary  to  supply  the  needed  money 
for  developing  the  railroads.  It  is  like- 
wise a  fair  rate  to  the  companies,  because 
if  it  be  high  enough  to  encourage  new  in- 
vestors to  supply  needed  money  from  time 
to  time,  it  will  produce  a  fair  return  on 
the  money  already  invested  in  the  prop- 
erties. 

"The  amendment  of  1910,  therefore,  in 
connection  with  the  Act  it  amends,  affords 
a  fair  workable  method  of  carrying  out  the 
policy  of  the  Government.  If,  then,  what 
I  have  said  is  true,  the  policy  of  the  Gov- 
ernment can  fail,  only  in  its  administra- 
tion. This  reflection  heightens  the  duty 
of  all  of  us  who  have  duties  to  perform  in 
relation  to  the  railroads,  because  every 
good  citizen  must  shudder  at  the  sugges- 
tion of  its.  failure. 

"The  question  presented  here  is  not  the 
ordinary  question  involved  in  an  attack 
upon  the  reasonableness  or  unreasonable- 

XXXI 


ness  of  a  rate — it  is  a  question  of  giving 
effect  to  a  great  public  policy.  The  con- 
crete question  to  be  decided  is  whether 
present  rates  have  produced  and  are  now 
producing  sufficient  revenue  to  the  com- 
panies to  justify  the  belief  that  much 
needed  new  capital  may  be  obtained  from 
private  investors  on  reasonable  terms. 

"The  only  object  of  investing  money  is 
personal  gain.  Private  capital  is  timid 
and  often  influenced  by  misapprehensions 
and  unfounded  suspicions.  Investors  owe 
no  duty  in  the  premises,  and  do  not  act 
by  compulsion,  but  invest  voluntarily  if  at 
all. 

"Many  misapprehensions,  with  respect 
to  the  purposes  of  the  Act  to  Eegulate 
Commerce,  have  been  hurtful  to  railroad 
credit.  By  some  it  has  been  assumed  that 
a  share  of  the  managements  of  the  rail- 
roads has  been  vested  in  the  Commission, 
when  in  fact,  notwithstanding  that  the 
many  public  abuses  which  provoked  the 
enactment  of  the  Law  were  due  to  private 
management,  the  Law  left  the  manage- 
ment with  the  investors  represented  by  the 
companies. 

"Others  have  assumed  that  the  power 
vested  in  the  Commission  was  designed  to 
prevent  the  companies  from  earning  a  re- 
turn on  watered  securities,  when  in  fact, 
notwithstanding  the  rank  abuses  attend- 
ing the  financing  of  the  companies  by  pri- 
vate investors — although  likely  not  more 
scandalous  than  attended  the  transactions 
of  the  Government  and  the  States  in  aid- 
ing the  construction  of  the  early  railroads 
— Congress  has  not,  directly  or  indirectly, 

xxx  ii 


exercised  any  authority  on  that  subject; 
in  fact,  the  legislation  now  pending  in 
Congress  on  that  subject  is  designed  to 
safeguard  future  investments  in  the  rail- 
roads. 

"The  absence  of  an  enactment  in  re- 
gard to  abuses  in  connection  with  issuing 
securities,  and  the  pendency  of  the  present 
legislation,  recognizes  that  Congress  has 
in  the  past  deemed  it  wise  to  allow  a  wide 
range  of  discretion  in  issuing  railroad  se- 
curities, with  a  view  to  encouraging  pri- 
vate investments  in  railroads;  and  that  it 
does  cot  now  regard  it  wise  to  further  un- 
settle railroad  credit  by  casting  a  cloud 
on  the  value  of  investments  made  in  good 
faith  in  securities  for  which  present  value 
may  not  have  been  received. 

"The  harmfulness  of  the  assumption 
that  those  securities  are  to  be  destroyed 
is  obvious  when  we  reflect  that  the  suppo- 
sition is  that  they  are  to  be  destroyed  by 
the  Government.  It  would  be  a  slander 
on  the  Government  to  say  that  while  it 
preserves  its  own  obligations  as  sacred,  it 
has  conferred  power  on  this  Commission, 
one  of  its  instrumentalities,  to  destroy  a 
large  class  of  investments  which  our  citi- 
zens have  made  in  good  faith. 


"'If  the  policy  of  the  Government  be 
executed,  allowance  must  be  made  in  the 
rates  to  cover  the  natural  timidity  of  pri- 
vate capital,  and  if  capital  is  to  be  ac- 
quired by  the  companies  at  reasonable  in- 
terest, their  rates  must  be  high  enough  to 
foreclose  question  as  to  the  security  of 
railroad  investments. 

XXX!  ii 


"It  will  not  reassure  the  investor  to 
say  that  the  companies  might  be  more 
profitably  managed.  That  would  frighten 
them  away,  and  if  it  may  ever  be  truth- 
fully said  that  the  managements  of  the 
companies  are  incompetent  and  wasteful, 
it  will  mean  that  the  policy  of  the  Gov- 
ernment has  failed. 

"So  the  question  is  not  one  merely  of 
theories  with  respect  to  maintenance  or 
efficiency  or  accounting,  but  it  is  a  broad, 
practical,  common  sense  question  which 
must  be  dealt  with  on  broad  lines." 


xxxi  v 


IU    LLC    I     I    IN      r 


The  Case  for  Increased  Railroad  Rates 


The  Case  for  the 
New  York  Central  Lines 

April  27,  1914. 

Mr.  0.  E.  Butterfield,  Assistant  Gen- 
eral Solicitor  for  the  New  York  Central 
Lines,  in  presenting  to  the  Interstate 
Commerce  Commission  the  position  of  his 
Company,  said : 

"We  bespeak  for  the  testimony  your 
most  sympathetic  consideration  in  the 
light  of  the  presumption  of  right  conduct 
which  the  Supreme  Court  has  said  at- 
tends the  work  of  railroad  managers,  and 
we  respectfully  urge  that  you  give  to  the 
testimony  and  judgment  of  the  men  who 
are  personally  responsible  for  the  welfare 
of  these  great  properties  the  weight  which 
their  selection  by  the  multitude  of  stock- 
holders of  these  various  corporations  and 
the  responsibility  thereby  imposed  upon 
them  properly  implies. 

"One  chief  executive  is  a  trained  civil 
engineer  with  years  of  experience  in  the 
executive  department  of  the  greatest  rail- 
road property  in  the  world;  one  is  a 
trained  locomotive  engineer  and  operator 
whose  service  of  an  executive  character 
has  been  devoted  to  several  great  prop- 
erties in  territory  east  and  west  of  the 
Mississippi,  and  one  has  come  up  from  a 
messenger  boy  to  the  presidency  at  the 
age  of  forty-nine  of  a  system  great 
enough  to  be  treated  by  the  Commission 
as  one  of  three  typical  of  the  territory. 

"They  probably  have  different  methods 
of  reasoning.  They  doubtless  reach  con- 
clusions by  different  mental  processes, 
but    the    important    thing   is    that    they 


reach  the  same  conclusion,  and  it  must 
not  be  forgotten  that  they  are  the  men 
who  are  devoting  their  whole  lives,  bodies 
and  souls  to  the  success  of  these  great 
properties.  They  are  the  men  who  in  case 
something  goes  wrong  may  be  charged 
with  manslaughter.  They  are  the  men 
who  bear  the  primary  responsibility  for 
safe  and  sufficient  transportation. 

"Will  you,  in  the  face  of  their  common 
testimony  on  a  vital  matter,  transfer  that 
mighty  responsibility  from  their  sea- 
soned shoulders  to  your  own  by  denying 
what  they  ask,  especially  when  the  de- 
mand is  practically  unopposed  by  those 
upon  whom  the  burden  must  ultimately 

fall? 

*     *     *     * 

The  New  York  Central 

"In  the  1910  case  you  held  that  the 
New  York  Central  System  should  be  con- 
sidered as  a  unit  in  these  words: 

"  'We  must  consider  the  value  of  the 
lines  east  of  Buffalo  in  connection 
with  its  lines  west,  and  so  considering 
we  must,  of  course,  have  regard  to  the 
financial  results  of  the  system  as  a 
whole.'     (p.  56.) 

"We  have  prepared  and  submitted  for 
the  New  York  Central  System  treated  as 
a  unit  a  statement  of  the  net  result  of  its 
operations  for  a  period  of  eleven  years. 
We  have  shown  you  that  since  1910,  when 
the  figures  were  last  before  you,  it  has 
added  $159,000,000  to  its  property  in- 
vestment devoted  to  the  public  use;  in 
the  year  1913  it  performed  services  for 
the  public  in  excess  of  those  performed  in 
1910,  the  extent  of  which  is  indicated  by 


an  increase  in  gross  revenue  of  $49,000,- 
000,  and  yet  for  the  year  ending  June  30, 
1913,  it  had  of  net  corporate  income 
available  for  dividends  and  surplus  over 
$3,000,000  less  than  it  had  in  1910. 

"  'In  other  words,  since  June  30, 
1910,  there  has  been  added  to  the 
property  investment  about  a  million 
dollars  a  week,  while  the  net  corpo- 
rate income  in  1913  was  less  by  about 
$63,000  a  week  than  in  1910,  indicat- 
ing that  expansion  of  business  has 
caused  a  net  loss  to  the  stockholders.' 
(Wishart,  p       .) 

"The  $159,000,000  was  mostly  ex- 
pended for  additional  facilities  to  accom- 
modate the  traffic  of  the  system.  In  the 
freight  service  alone  sixty-seven  tons,  or 
14  per  cent.,  were  added  to  the  average 
load  of  freight  trains,  and  24,711  more 
freight  trains  were  operated  than  in  1910, 
and  yet  the  net  corporate  income,  not- 
withstanding this  increased  service,  fell 
below  that  of  1910  at  the  rate  of  $9,000  a 
day. 

"And  we  have  shown  in  the  testimony 
that  in  order  to  provide  for  the  future 
the  system  must  add  to  its  property  in- 
vestment in  the  neighborhood  of  forty 
million  dollars  a  year.  The  Public  Serv- 
ice Commission  of  the  State  of  New  York, 
investigating  the  proposed  general 
scheme  of  financing  for  the  New  York 
Central,  reached  this  conclusion: 

"  'The  testimony  is  strong  and  con- 
vincing that  a  plan  of  financing  in 
the  future  for  the  New  York  Central 
properties  is  necessary.  Large  ex- 
penditures, estimated  to  reach  or  ex- 
ceed $400,000,000  in  the  next  ten 
years,  are  already  foreseen  as  detailed 
in    the    testimony,    and    to    many    of 


these,  aggregating  very  large  sums, 
the  New  York  Central  is  committed; 
and  there  is  also  like  commitment  on 
the  part  of  some  of  the  allied  lines.' 
(Opinion  in  the  matter  of  the  Appli- 
cation for  Leave  to  Issue  Bonds,  p. 
63.) 

Return  on  Capital  Stock 

"The  per  cent,  of  net  corporate  income 
on  capital  stock  outstanding  in  the  case 
of  the  New  York  Central  System  is  11.08 
per  cent.,  and  the  suggestion  is  made  that 
this  figure  does  not  tend  to  support  a  de- 
mand for  increased  net  revenue. 

"A  complete  and  conclusive  answer  to 
this  suggestion  is  to  be  found  in  the  fact 
shown  on  the  same  statement,  that  the 
capital  stock  per  cent,  on  total  capital  ob- 
ligations in  the  case  of  this  system  is  only 
27  per  cent.,  whereas  in  the  case  of  the 
Penns}dvania  System  it  is  about  50  per 
cent.,  as  it  should  be. 

"The  testimony  shows,  and  it  is  per- 
fectly well  understood,  that  a  percentage 
of  capital  stock  to  total  capital  obligations 
which  does  not  exceed  27  per  cent,  is  an 
element  of  financial  weakness,  for  the 
obvious  reason  that  the  margin  between 
capital  obligations  which  must  be  met 
and  the  net  corporate  income  of  the  com- 
pany is  thereby  made  narrower. 

*     *     *     * 

"The  total  capital  obligations  of  the 
New  York  Central  System,  as  shown  by 
the  statement  June  30,  191?,  amounted 
to  $1,315,206,374.  If  one-half  were 
stock  the  stock  would  amount  to  $657,- 
603,187.  Assuming  that  the  funded  debt 
of     June     30,     1913,     was     outstanding 


throughout  the  year,  it  appears  from  the 
statement  that  the  average  rate  of  interest 
paid  was  3.99  per  cent. 

"The  interest,  therefore,  upon  $657,- 
000,000  of  bonds  would  have  been  $26,- 
238,367,  or  $11,690,969  less  than  the  in- 
terest paid  in  that  year  as  shown  by  the 
statement— $37,929,336.  This  saving  in 
interest  of  $11,690,969  would  swell  the 
net  corporate  income  from  $40,370,472  to 
$52,061,441,  or  7.92  per  cent,  on  the  cap- 
ital stock  outstanding,  which  we  have  as- 
sumed to  be  50  per  cent,  of  the  total  cap- 
ital obligations,  or  $657,000,000. 

"In  other  words,  if  the  per  cent,  of 
capital  stock  to  total  capital  obligations  on 
the  Xew  York  Central  System  had  been 
50  per  cent,  instead  of  27  per  cent.,  the 
figure  representing  the  net  corporate  in- 
come per  cent,  on  capital  stock  outstand- 
ing would  have  been  7.92  instead  of  11.08. 

"The  dividend  paid  averaged  5.44  per 
cent.  Nobody  will  suggest  that  we  were 
not  entitled  to  6  per  cent,  on  the  capital 
stock  even  if  the  capital  stock  had  been, 
as  it  should  have  been,  one-half  the  total 
capital  obligations.  It  thus  appears  that 
we  were  entitled  to  $39,456,000  in  divi- 
dends, which  would  have  left  out  of  the 
net  corporate  income  of  $52,000,000, 
$12,605,000,  instead  of  something  like 
$20,000,000,  which  we  show  in  1913,  or  a 
surplus  less  than  one-third  of  the  amount 
paid  out  in  dividends. 

"If,  in  1910,  our  percentage  of  capital 
stock  to  total  capital  obligations  had  been 
50  per  cent.,  as  it  should  have  been,  in- 
stead of  31  per  cent.,  the  net  corporate 


income  percentage  of  capital  stock  out- 
standing instead  of  being  11.59  per  cent, 
would  have  been,  if  my  computation  is 
correct,  8.6  per  cent. 

"We  take  it  from  the  questions  pro- 
pounded to  Mr.  Smith  upon  cross-exami- 
nation by  Mr.  Thome,  of  Iowa,  that  his 
chief  reliance  in  support  of  his  interpre- 
tation of  our  figures  will  be  the  fact  that 
in  1913  the  net  corporate  income  of  the 
New  York  Central  was  better  than  it  had 
ever  been  before  in  any  year  except  the 
year  1910,  but  we  submit  that  by  every 
principle  of  business  the  net  corporate 
income  of  the  New  York  Central  System 
for  the  year  1913  should  have  been 
greater  than  the  net  corporate  income  in 
1910. 

"In  1913  we  were  doing  business  with 
$159,000,000  more  of  property  invest- 
ment than  we  had  in  1910,  and  we  did 
$49,000,000  worth  more  business  than  we 
did  in  1910.  If  we  were  in  a  condition  of 
prosperity  why  should  not  our  net  corpo- 
rate income  in  1913  exceed  the  net  cor- 
porate income  in  1910? 

"Not  only  that,  but  it  should  have  been 
better  in  1911  than  it  was  in  1910.  In 
1911  we  were  doing  business  with  $67,- 
000,000  more  of  investment,  and  our  total 
operating  revenue  was  nearly  $7,000,000 
greater  than  it  was  in  1910,  and  yet  our 
net  corporate  income  fell  off  $15,000,000. 
The  net  corporate  income  in  1911  should 
have  been  more  than  $43,000,000  if  the 
system  was  in  a  prosperous  condition. 

"In  1912  our  property  investment  was 
$115,000,000  more  than  it  was  in  1910, 


and*  our  gross  operating  revenue  was 
nearly  $17,000,000  more  than  it  was  in 
1910,  and  yet  our  net  corporate  income 
was  $8,000,000  less  than  it  was  in  1910. 
The  net  corporate  income  in  the  year 
1913  should  have  been  more  than  $43,- 
000,000  if  the  system  was  enjoying  the 
prosperity  which  its  increased  investment 
and  its  increased  business  indicated." 


xli 


JLLETIN   G 


The  Case  for  Increased  Railroad  Rates 


The  Railroad  Campaign  for 
Increased  Freight  Rates 

Washington,  May  1,  1914. 

In  a  closing  statement  for  the  railroads 
in  the  case  for  a  5  per  cent,  increase  in 
freight  rates,  Mr.  Daniel  Willard,  presi- 
dent of  the  Baltimore  and  Ohio  Railroad, 
said: 

"It  has  heen  definitely  shown  in  the 
record  that  the  railroads,  parties  to  this 
proceeding,  have  spent  during  the  last 
ten  years  for  additions  and  betterments — 
meaning,  of  course,  additional  and  better 
facilities  for  transportation — an  amount 
of  new  money  exceeding  $200,000,000  per 
year,  and  those  who  ought  to  know  some- 
thing of  the  future  requirements  of  the 
same  carriers,  and  speaking  with  a  full 
knowledge  of  the  history  of  the  past,  have 
said  that  a  sum  even  greater  than  that 
will  be  necessary  each  year  in  the  future 
for  the  purpose  of  providing  such  addi- 
tional facilities  and  equipment  as  will  be 
required  to  keep  the  carrying  capacity  of 
these  carriers  abreast  with  the  productive 
growth  of  the  country  which  they  serve, 
and  there  is  thereby  presented  a  problem, 
easy  or  difficult  as  the  case  may  be,  of  pro- 
viding that  large  sum  of  new  money  re- 
quired each  year  for  such  facilities. 

"The  carriers  interested  in  this  pro- 
ceeding, speaking  through  their  executives 
and  counsel,  have  said  that  the  financial 
results  of  the  immediate  past  have  not 
been  such  as  to  encourage  the  expenditure 
of  new  money  for  such  facilities  by  these 
railroads,  and  realizing  the  vital  import- 
ance of  this  question  to  all  concerned,  and 
all  are  concerned,  the  carriers  endeavored 
xlii 


to  meet  the  situation  by  means  of  new 
freight  schedules  which  they  caused  to  be 
prepared  and  filed  with  this  Commission. 
These  schedules  provide  as  nearly  as  prac- 
ticable for  a  small  and  substantially  uni- 
form advance  upon  all  freight  carried 
within  the  territory  affected,  such  advance 
being  approximately  5  per  cent. 

"The  carriers  did  not  overlook  the  fact 
that  under  certain  conditions  increased 
revenue  might  also  be  obtained  from  other 
lines  of  procedure.  They  felt,  however, 
that  the  plan  they  proposed  was  under  all 
the  circumstances  the  best  and  most  prac- 
ticable one  at  that  time,  and  one  of  the 
questions,  and,  as  I  view  it,  the  most  im- 
portant question  before  this  Commission 
at  the  present  moment,  is,  Shall  the  new 
tariffs  now  on  file  be  permitted  to  become 
effective  ?  In  that  connection  I  would  like 
to  suggest  that  should  this  Commission  in 
its  wisdom  approve  of  the  tariffs  just  re- 
ferred to,  and  should  it  later  on  find  that 
any  particular  rate  then  in  effect  ought  to 
be  reduced,  the  Commission  has  ample 
power  to  order  such  reduction — certainly 
a  condition  not  difficult  to  deal  with. 

"On  the  other  hand,  if  this  Commission 
should  decide  to  withhold  its  consent  with 
relation  to  the  new  tariffs,  then  unless 
those  who  represent  the  carriers  in  this 
proceeding  are  wholly  mistaken,  or  worse 
yet,  have  intentionally  sought  to  deceive 
this  Commission  for  the  purpose  of  im- 
posing unreasonable  rates  upon  the  com- 
merce of  this  country,  the  very  serious 
problem  will  still  remain,  of  how  to  obtain 
without  undue  delay  the  money  with  which 
to  provide  for  the  constantly  growing  busi- 
xliii 


ness.  That  those  speaking  for  the  rail- 
roads have  not  been  wholly  mistaken  is 
perhaps  indicated  by  the  general  apathy 
which  is  known  to  exist  at  the  present 
time,  so  far  as  railroad  improvement  and 
betterment  is  concerned,  particularly  in 
the  territory  served  by  the  carriers  in- 
volved in  this  proceeding,  and  also  by  the 
further  fact  that  equipment  builders  are 
working  to-day  at  approximately  one- 
third  only  of  their  normal  capacity,  and 
that,  too,  at  a  time  when  we  are  encour- 
aged to  believe  that  the  maturing  crops 
will  exceed  in  volume  anything  in  the 
previous  history  of  this  country.  Under 
such  conditions  as  in  the  past,  it  has  been 
customary  to  find  the  car  and  locomotive 
builders  working  their  plants  to  their 
fullest  capacity,  for  the  purpose  of  pro- 
viding the  equipment  necessary  to  move 
the  expected  tonnage. 

"At  the  present  moment,  whether  we 
approve  of  it  or  not,  whether  we  like  it 
or  not,  and  I  am  sure  we  do  neither,  the 
railroads  as  a  whole,  in  Official  Classifi- 
cation Territory,  are  compelled  by  cir- 
cumstances to  follow  a  policy  of  enforced 
economies  which,  if  continued,  means  less 
efficient  and  less  satisfactory  transporta- 
tion for  that  very  important  part  of  the 
United  States,  and  it  seems  to  me  that 
our  broad  economic  policy  in  that  connec- 
tion should  contemplate  more  and  better 
railroads  rather  than  fewer  and  poorer 
railroads.  This  Commission  has  well 
said  that  'Commerce  and  industry  cannot 
afford  to  wait  on  transportation  facili- 
ties/ 

"During    the    entire    progress    of    this 

xliv 


case  it  has  been  the  constant  aim  and  de- 
sire of  those  connected  with  its  develop- 
ment, that  the  utmost  care  .should  be 
used  in  the  preparation  of  statements  and 
statistics,  in  order  that  the  true  situation 
might  be  clearly  set  forth.  We  have  felt 
that  because  of  what  has  come  to  be  the 
semi-public  nature  of  our  employment  as 
railroad  officers,  that  the  public  as  well 
as  this  Commission  has  a  right  to  expect 
from  us  a  somewhat  more  dispassionate 
attitude  concerning  the  issues  involved 
than  would  perhaps  otherwise  be  looked 
for.  I  hope  we  have  not  fallen  too  far 
short  of  that  standard. 

The  "Propaganda" 

"There  is  one  other  matter  which, 
while  not  strictly  in  the  case,  is  none  the 
less  of  the  case,  and  to  which  I  think  I 
ought  to  refer  before  closing.  Reference 
has  frequently  been  made  during  the  pro- 
ceedings to  a  certain  so-called  propaganda, 
supposed  to  have  been  promoted  by  the 
railroads.  Perhaps  the  best  answer  we 
can  make  to  that  is  a  plain  statement  of 
what  we  have  done.  We  have  done,  or 
tried  to  do,  two  particular  things:  First, 
we  informed  the  shippers  of  our  needs 
and  consulted  with  them  as  to  the  best 
means  for  supplying  those  needs;  and, 
second,  we  took  steps  to  keep  them  and 
the  general  public  informed  of  the  facts, 
both  before  and  after  the  case  was  begun. 

"After  the  rate  decision  in  1911,  a 
number  of  my  friends  among  the  ship- 
pers said  to  me  that  the  railroads  had 
made  a  mistake  in  that  case  by  not  con- 
sulting with  them — the  shippers — before 

xlv 


definitely  deciding  upon  a  course  of  ac- 
tion. When  it  was  decided  to  take  the 
matter  up  again  in  the  present  case,  I  re- 
called the  advice  which  my  shipping 
friends  had  given  me  before,  and  to  which 
I  have  just  referred,  and  I  concluded  that 
in  this  particular  instance  I  would  do  the 
thing  that  we  have  been  criticised  for  not 
doing  in  the  former  movement,  and  I 
may  add  that  my  associates  were  strongly 
of  the  same  point  of  view.  With  that  in 
mind  we  met  committees  representing 
trades  associations  in  Boston,  Chicago, 
New  York  and  other  cities  for  the  pur- 
pose of  discussing  with  them  the  needs 
of  the  railroads,  and  we  asked  their  con- 
sideration of  a  plan  contemplating  a  small 
and  substantially  uniform  increase  of  all 
freight  charges.  This,  you  will  under- 
stand, was  before  any  definite  action  was 
taken  in  this  case,  and  we  found  substan- 
tial unanimity  in  favor  of  such  a  course, 
and  it  was  finally  decided  to  act  accord- 
ingly. During  the  development  of  the 
case,  however,  I  continued,  when  oppor- 
tunity afforded  itself,  to  meet  and  talk 
with  shippers  and  trades  bodies,  as  well 
as  with  representatives  of  the  press.  I 
explained  to  them  the  situation  of  the 
railroads  as  I  understood  it,  and  advo- 
cated their  support  of  the  plan  which  we 
proposed,  and  if  what  I  did  in  that  di- 
rection, as  just  explained  by  me,  is  equiv- 
alent to  promoting  and  encouraging  a 
propaganda  in  favor  of  a  uniform  ad- 
vance in  freight  rates,  then  I  am  quite 
willing  to  assume  full  responsibility  for 
so  doing;  but  that  anything  improper  was 
done  in  that  connection,  or  that  money 

xlvi 


was  spent  for  the  purpose  of  influencing 
the  press  or  any  other  organization,  I 
most  emphatically  deny.  It  may  be  that 
I  have  been  mistaken  in  some  or  many  of 
my  statements,  but  it  is  most  certainly  a 
fact  that  I  believed  what  I  said  to  be 
true  when  I  said  it,  and  furthermore,  I 
believe  it  to  be  true  now.  I  have  felt  that 
I  ought,  in  justice  to  myself  and  to  the 
railroads  generally,  to  make  this  explana- 
tion. 

Policy  Toward  the  Press 

"In  addition  to  advising  with  the  ship- 
pers directly  as  to  our  proposed  policy,  a 
definite  program  was  decided  upon  with 
reference  to  the  press  during  these  hear- 
ings. Realizing  the  complicated  charac- 
ter of  the  questions  involved  in  this  case, 
we  have  co-operated  with  the  representa- 
tives of  the  press  in  Washington  to  the 
end  that  they  should  have  clear  and  accu- 
rate statements  of  the  evidence  which  we 
have  offered.  Furthermore,  we  have  pre- 
pared short  abstracts  of  the  more  im- 
portant portions  of  the  evidence,  and  dis- 
tributed them  to  the  press  directly 
throughout  our  territory. 

"Of  necessity,  however,  the  press  could 
carry  only  fragmentary  accounts  of  the 
hearings.  We  have,  therefore,  not  relied 
entirely  upon  such  reports  as  newspapers 
might  make,  but  have  seen  to  it  that  these 
abstracts  of  the  testimony  that  was  pre- 
sented to  the  Commission  were  distrib- 
uted direct  to  members  of  Congress,  mem- 
bers of  Legislatures  of  the  States  through 
which  our  lines  run,  members  of  State 
railroad  commissions,  officers  of  trade  or- 
xlvii 


ganizations,  and  others  who  were  prop- 
erly entitled  to  know  the  facts  upon  which 
we  based  our  contentions  before  this  Com- 
mission. 

"It  must  be  realized  that  the  problems 
confronting  these  carriers  goes  far  beyond 
the  scope  of  this  particular  proceeding. 
Yet  the  facts  which  we  have  attempted  to 
bring  before  the  Commission  in  this  pro- 
ceeding are  highly  illuminating  with  ref- 
erence to  this  general  problem. 

"We  have  restricted  what  we  have  dis- 
tributed to  the  press  or  public  to  state- 
ment of  fact  actually  presented  to  this 
Commission,  and  we  have  sent  to  the 
Commission  itself  copies  of  all  materials 
distributed.  Everything  has  been  done 
frankly  and  candidly,  not  to  mislead  but 
to  inform,  and  in  accord  with  what  we  be- 
lieve were  considerations  of  sound  public 
policy. 

"There  is  one  other  matter  to  which  I 
also  think  I  ought  to  make  reference.  It 
has  been  suggested  that  the  carriers  have 
attempted  to  bring  to  bear  upon  the  Com- 
mission undue  pressure  in  favor  of  a  hasty 
decision,  and  there  again  I  wish  to  dis- 
claim any  such  desire  or  effort  upon  my 
part,  or,  so  far  as  I  know,  on  the  part  of 
any  of  the  carriers  connected  with  this 
movement.  As  is  natural,  I  suppose,  I 
personally  have  been  very  deeply  inter- 
ested in  this  case,  and  feeling  as  I  have 
about  the  necessities  of  the  carriers,  and 
about  the  possibilities  of  the  future  in 
case  relief  could  not  be  obtained,  it  may 
be  that  I  at  times  seemed  over-anxious. 
I  hope  I  have  not  appeared  so  to  this 

xlriii 


Commission,  but  if  I  have,  I  beg  they  will 
understand  that  it  simply  reflected  uncon- 
sciously the  earnestness  of  my  belief. 

"I  wish  to  take  this  occasion  to  thank 
the  Commission  and  also  its  distinguished 
counsel,  on  behalf  of  my  associates  and 
myself,  for  the  patience  they  have  shown, 
and  for  the  many  courtesies  extended,  and 
while  we  appreciate  fully  the  great  respon- 
sibility which  rests  with  the  Commission 
because  of  the  magnitude  of  the  problem 
awaiting  its  solution,  we  are  confident 
that  because  of  its  full  knowledge  of  the 
subject,  and  because — I  also  venture  to 
say — of  its  high  sense  of  duty  and  its 
courage,  it  will  reach  a  conclusion  just 
and  equitable  to  all  concerned." 


xlix 


Testimony 


The  Case  for  Increased  Railroad  Rates 


General   Statement  on  Behalf 
of  the  Railroads 

Made  before  the  Interstate 
Commerce  Commission,  at  Wash- 
ington, November  24,  1913, 

By  Daniel  Willard, 

President  of  the  Baltimore  and 
Ohio  Railroad  Company,  and 
chairman  of  the  Committee  of 
railroad  presidents  appointed  to 
present  the  railroad  case  to  the 
Interstate  Commerce  Commission. 


The  railroads,  parties  to  this  proceed- 
ing, include  practically  all  the  lines  oper- 
ating in  so-called  Official  Classification 
territory,  which  is  substantially  all  that 
part  of  the  United  States  east  of  the  Mis- 
sissippi and  north  of  the  Ohio  and  Poto- 
mac Rivers.  The  same  companies  were 
also  parties  in  a  similar  proceeding  before 
this  Commission  in  1910. 

In  its  report  of  that  investigation, 
known  as  I.  C.  C.  3400,  the  Commission 
made  a  comprehensive  review  of  the  whole 
subject  and  found  that  the  carriers  had 
failed  to  establish  the  need  of  additional 
revenue  from  increased  rates  at  that  time. 
It  recognized,  however,  that  it  might 
come  about  in  the  future,  as  the  carriers 
feared,  that  the  net  earnings  from  the 
then  existing  basis  of  rates  would  be  in- 
adequate, but  held  that  this  could  only  be 
determined  by  an  actual  test.  It  said,  "If 
actual  results  should  demonstrate  that 
our  forecast  of  the  future  is  wrong,  there 
might  be  ground  for  asking  a  further  con- 
sideration of  the  subject." 


Since  1910  sufficient  time  has  elapsed 
to  afford  the  actual  test,  and  with  the 
records  of  operation  for  the  three  inter- 
vening years  available,  the  same  carriers 
appear  again,  believing  that  the  results  of 
the  actual  test  will  now  demonstrate  the 
necessity  for  additional  revenues  or  net 
earnings. 

In  I.  C.  C.  3400,  page  19,  the  following 
language  is  used : 

"Our  railroads  must  be  maintained  in  a  high 
state  of  efficiency.  This  the  public  interest  de- 
mands. Commerce  and  industry  cannot  afford 
to  wait  on  transportation  facilities.  Our  rates 
should  be  such  as  to  render  possible  a  high- 
class,  not  an  extravagant  service. 

"It  is  generally  conceded  that  within  the  next 
few  years,  if  our  means  for  transportation  by 
rail  are  to  keep  pace  with  the  calls  upon  them, 
very  large  sums  must  be  expended  in  the  way 
of  new  construction  and  new  equipment.  While 
some  small  portion  of  this  may  come  from 
current  earnings,  the  great  bulk  must  be  new 
capital.  This  capital  must  be  obtained  from 
the  investing  public. 

"If,  therefore,  we  are  to  rely  on  the  future, 
as  we  have  in  the  past,  upon  private  enterprise 
and  private  capital  for  our  railway  transporta- 
tion, the  return  must  be  such  as  will  induce  the 
investment.  It  is  therefore  not  only  a  matter 
of  justice,  but  in  the  truest  public  interest  that 
an  adequate  return  should  be  allowed  upon 
railway  capital." 

While  the  carriers  fully  recognize  and 
acknowledge  their  obligations  to  the  pub- 
lic, and  are  alive  to  the  responsibilities  so 
imposed,  they  are  helpless  to  fulfill  these 
obligations,  unless  the  financial  result  of 
their  operation  is  such  as  to  inspire  the 
confidence  of  private  capital  and  encour- 
age the  support  of  private  enterprise,  and 
the  result  of  operation  during  the  last 
three  years  is  not  such  as  to  inspire  the 
one  or  encourage  the  other. 

Problem  Not  Merely 
of  Dividends 

This  as  we  view  it  is  the  situation  to- 
day, and  if  we  are  right,  it  is  respectfully 
submitted  that  there  is  at  this  time  no 


t) 


more  important  question  before  the  peo- 
ple, nor  one  the  correct  solution  of  which 
will  do  more  to  stimulate  healthy  com- 
mercial activity  and  promote  industrial 
growth.  It  is  a  mistake  to  think  that  the 
problem  is  merely  a  question  of  dividends 
to  railroad  stockholders,  although  that 
feature  is  of  course  involved.  The  prob- 
lem in  a  broad  and  true  sense  affects  all 
interests,  and  the  outcome  of  this  par- 
ticular case — whichever  way  it  is  decided 
— will  mark  an  epoch,  because  it  will,  in 
effect,  very  largely  determine  whether  we 
shall  as  in  the  past  continue  to  look  to 
private  capital  and  private  enterprise  for 
our  transportation  requirements,  or  be 
compelled  finally  to  accept  the  only  alter- 
native possible.  It  is  recognized,  of  course, 
that  railroad  expansion  and  improvements 
must  go  on,  and  any  tendency  or  condi- 
tion that  threatens  to  seriously  check,  if 
not  completely  stop  such  expansion  in  a 
large  and  important  part  of  the  United 
States,  becomes,  because  of  that  fact,  a 
matter  of  vital  importance. 

This  commission  in  its  report,  I.  C.  C. 
•'{400,  said  that  the  railroads  had  failed  to 
establish  a  necessity  for  higher  rates  at 
that  time.  It  also  said,  in  effect,  that  it 
believed  that  from  the  increase  in  gross 
earnings  which  would  undoubtedly  come 
to  the  railroads,  together  with  such  econ- 
omies as  the  Companies  might  effect,  the 
net  earnings  of  the  future  would  be  ade- 
quate, but  it  also  said  that  should  it  come 
about  that  its  views  were  not  sustained  by 
future  developments,  and  should  it  appear 
at  any  time  that  there  was  a  real  necessity 
on  the  part  of  the  carriers  for  increased 
revenue,  in  order  that  they  might  be  in 
position  to  provide  such  facilities  as  the 
public  required,  that  it  would,  upon  re- 
quest, give  the  matter  further  considera- 
tion. 


Net  Earnings 
Decreasing 

During  the  first  two  years  immediately 
following  the  decision,  the  commerce  of 
the  country  showed  little,  if  anjr,  change 
in  volume,  but  during  the  last  fiscal  year 
there  was  a  marked  activity  in  business  of 
all  kinds,  and  the  gross  earnings  of  the 
railroads  generally  for  the  year  ended 
June  30,  1913,  were  the  largest  in  their 
history.  Notwithstanding  the  increased 
gross,  however,  the  railroads  in  Official 
Classification  territory  continue  to  show 
decreases  in  net  earnings,  and  as  the  Com- 
mission well  said  in  the  opinion  above  re- 
ferred to,  "It  is  the  net,  not  the  gross,  we 
must  consider."  This  decrease  in  net 
earnings  has  been  due  largely  to  greatly 
increased  expenses,  as  pointed  out  in  the 
petition  which  the  carriers  filed  for  re- 
hearing on  May  14,  1913,  from  which  I 
will  quote: 

"The  cost  of  conducting  the  business  of  the 
carriers  has  been,  and  is  being,  steadily  in- 
creased by  increases  in  capital  charges;  in- 
creases in  wages,  in  taxes,  by  burdens  imposed 
by  legislative  enactments,  such  as  extra  crew 
laws,  employers'  liability  and  compensation 
acts,  by  the  elimination  of  grade  crossings, 
either  in  part  or  in  whole  at  the  expense  of 
the  carriers,  and  in  various  other  respects,  and 
it  is  felt  that  existing  rates  are  insufficient  to 
afford  just  and  reasonable  compensation  and 
return  to  the  carriers,  and  are  unreasonably 
low  in  view  of  the  value  of  the  service  afforded 
thereunder." 

In  the  application  for  rehearing,  just 
referred  to,  the  carriers  asked  permission 
to  advance  freight  rates  in  Official  Classi- 
fication territory  on  the  basis  of  5  per 
cent.,  with  reasonable  minima  and  with 
the  modifications  necessary  to  preserve 
differential  relations.  The  Commission 
thereupon  ordered  that  this  proceeding  of 
inquiry  be  instituted  into  the  following 
matters : 


"First,  do  the  present  rates  of  transportation 
yield  adequate  revenues  to  common  carriers 
by  railroad  operating  in  Official  Classification 
territory? 

"Second,  if  not,  what  general  course  may 
carriers  pursue  to  meet  the  situation  T" 

The  railroads,  parties  to  this  proceed- 
ing, have  prepared  new  tariffs,  advancing 
freight  rates  as  suggested  in  their  peti- 
tion, and  have  placed  the  tariffs  on  file 
with  this  Commission  and  at  stations,  so 
that  all  concerned  might  be  fully  advised 
regarding  the  effect  of  the  proposed  in- 
crease. 

In  order  to  develop  the  whole  situation 
and  to  show  the  actual  operating  results 
obtained  during  the  last  three  years,  tables 
have  been  prepared,  containing  such  in- 
formation as  is  necessary  to  show  the 
changes  that  have  gradually  come  about 
in  property  investment,  earnings,  cost  of 
operation,  income,  etc.,  not  only  during 
the  three-year  period,  but  also  for  the  last 
ten  years.  This  has  been  done  because 
the  influences  which  have  brought  about 
the  existing  conditions  have  been  operat- 
ing over  a  considerable  period  of  time. 
The  present  situation,  and  the  gradual 
but  consistent  tendency  in  that  direction 
are  both  clearly  indicated  in  these  tables. 
Separate  tables  have  been  prepared  for 
each  of  the  several  companies  for  the  pe- 
riods above  mentioned,  and  a  combined 
statement  giving  the  consolidated  figures 
for  all  of  the  companies  has  also  been  pre- 
pared, and  all  of  the  tables  have  been  or 
will  be  filed  with  the  Commission. 

The  Increased 
Investment 

A  brief  reference  to  some  of  the  more 
striking  features  in  the  statements  may 
be  pertinent  at  this  time.  The  consoli- 
dated statement  shows,  for  instance,  that 
during  the  fiscal  years  ended  June  30, 
1911,  1912  and  1913,  the  railroads  inter- 


ested  in  this  movement  increased  their 
property  investment  $659,862,000.  The 
gross  earnings  of  these  roads  during  the 
last  fiscal  year  were  $1,424,119,000,  or 
$186,775,000  greater  than  they  were  in 
the  fiscal  year  ended  June  30,  1910. 

The  operating  expenses  and  taxes  dur- 
ing the  last  fiscal  year,  for  the  same  roads 
at  $1,087,365,000  were  $203,087,000 
greater  than  they  were  in  1910;  so  that 
even  though  these  railroads  earned  in 
gross  during  the  last  fiscal  year  $186,775,- 
000  more  than  was  earned  three  years  pre- 
vious, the  net  result,  after  paying  operat- 
ing expenses  and  taxes,  was  actually  $16,- 
311,000  less  than  it  was  in  1910,  notwith- 
standing the  fact  that  over  $659,000,000 
of  additional  money  had  been  spent  in  the 
meantime  for  additions,  betterments  and 
equipment.  These  companies  apparently 
not  only  failed  to  earn  any  return  what- 
ever upon  the  new  capital  invested,  but 
saved  even  less  from  gross  earnings,  as  re- 
turn upon  the  original  property  invest- 
ment, than  they  were  able  to  show  before 
this  large  additional  expenditure  was 
made. 

Another  table  has  been  prepared  show- 
ing the  combined  results,  for  4;he  same 
period,  of  the  Pennsylvania,  New  York 
Central  and  Baltimore  and  Ohio  Systems, 
these  particular  companies  having  been 
referred  to  by  the  Commission  in  report 
I.  C.  C.  3400,  as  typical  systems.  This 
table  shows  that  on  these  three  systems 
during  the  three-year  period  mentioned, 
the  property  investment  was  increased 
$423,431,000.  The  combined  gross  earn- 
ings during  the  same  period  increased 
$109,380,000,  while  net  operating  income 
of  all  three  systems,  after  paying  operat- 
ing expenses  and  taxes,  was  $8,380,000 
less  in  1913  than  in  1910,  notwithstand- 
ing the  fact  that  over  $423,000,000  had 
boon   spent  in  the  meantime  for  better- 


merits,  additional  equipment,  etc.  1 
might  also  add  that  in  the  single  case  of 
the  Baltimore  and  Ohio  System,  the  tables 
show  that  the  property  investment  of  that 
Company  was  increased  over  $56,000,000 
during  the  same  three-year  period;  the 
gross  earnings  in  the  meantime  increased 
over  $13,000,000,  but  the  net  operating 
income  in  1913,  after  paying  expenses 
and  taxes,  was  $660,000  less  than  in  1910. 

New  Capital  Earned 
Little  or  No  Return 

The  separate  reports  of  the  roads  or 
systems  which  will  be  submitted  show 
that  the  same  tendencies  have  operated  in 
greater  or  less  degree  in  the  case  of  each 
individual  company.  In  brief,  it  appears 
to  have  come  about  that  the  new  capital 
invested  in  railroads  in  Official  Classifica- 
tion territory,  during  the  last  three  years, 
has  earned  little  or  no  return;  in  fact, 
these  properties  generally  are  actually 
earning  less  net,  after  paying  operating 
expenses  and  taxes,  than  they  were  earn- 
ing at  the  beginning  of  the  period,  and 
before  the  $659,862,000  had  been  spent. 
It  would  seem  that  the  mere  statement 
of  the  case  should  be  sufficient  to  indicate 
the  serious  situation  which  confronts  not 
only  the  railroads  in  this  territory,  but 
also  those  industries  and  commercial  un- 
dertakings which  depend  upon  the  rail- 
roads for  transportation. 

The  result,  as  might  be  expected,  of  this 
constant  tendency  toward  diminishing 
net  returns,  has  been  to  seriously  check, 
if  not  altogether  stop,  the  normal  devel- 
opment of  railroad  facilities  in  the  terri- 
tory affected.  The  tables  show  that  dur- 
ing the  ten-year  period  these  railroads 
found  it  necessary  to  increase  their  prop- 
ertv  investment  approximately  $2,000,- 
000,000,  an  average  of  about  $200,000,000 
per  annum,  and  it  is  certain  that  an  equal 


if  not  greater  amount  per  annum  will  be 
necessary  to  meet  the  requirements  of  the 
future. 

Kailroad  managers  would  hardly  be  ex- 
pected, under  the  circumstances  just 
stated,  to  continue  large  capital  expend- 
itures for  betterments  and  additions,  if 
possible  to  avoid  doing  so,  at  least  unless 
they  had  reason  to  believe  that  something 
had  happened,  or  was  about  to  happen, 
which  would  materially  change  the  situa- 
tion. It  is  believed  that  the  preceding 
statements,  if  confirmed,  are  sufficient  in 
themselves  to  justify  the  request  which 
the  carriers  now  make  for  advanced  rates, 
unless  it  can  be  shown  that  the  causes 
which  have  operated  to  bring  about  such 
results  are  of  a  temporary  character,  or 
have  now  ceased  to  exist.  As  already 
stated,  while  the  matter  has  only  recently 
reached  an  acute  stage,  the  influences 
which  have  as  a  whole  served  to  bring 
about  the  present  condition  have  been  op- 
erating for  a  number  of  years.  Evidence 
will  be  submitted  to  show  some  of  the  con- 
tributing causes  and  their  effects.  It  was 
shown  in  case  I.  C.  C.  .3400  that  the  ad- 
vanced wage  movement  culminating  in 
1910  would  increase  the  wage  payments  of 
the  railroads  in  this  territory  approxi- 
mately $34,000,000  per  annum.  The 
Commission,  in  its  report,  expressed  the 
opinion  that  in  view  of  the  large  recent 
increases,  it  seemed  fair  to  assume  that 
wages  would  not  much  increase  in  the  im- 
mediate future.  Evidence  to  be  submit- 
ted, however,  will  show  that  subsequent  to 
the  general  increase  in  1910,  a  similar 
movement  was  inaugurated  in  1912,  and 
increases  already  gained  by  this  last 
movement — largely  as  a  result  of  media- 
tion and  arbitration  proceedings — have 
greatly  augmented  the  wage  payments  of 
these  same  carriers. 


Increasing 

Wages 

The  award  just  recently  announced  by 
the  arbitrators  in  the  matter  of  the  ap- 
plication for  increase  in  wages  by  the 
conductors  and  trainmen  in  eastern  terri- 
tory, it  is  estimated,  will  give  approxi- 
mately $6,000,000  increased  wages  annu- 
ally to  the  conductors  and  trainmen  em- 
ployed by  the  railroads  affected,  all  of 
which  are  in  Official  Classification  terri- 
tory. The  effect  of  this  increase  is  not 
shown  in  any  of  the  other  figures  which  I 
am  using  at  the  present  time. 

A  full  statement,  showing  the  general 
wage  increases  made  during  the  three- 
year  period,  and  the  procedure  under 
which  they  were  obtained  will  be  pre- 
sented. 

The  total  wage  payment  of  the  Balti- 
more and  Ohio  System  has  been  increased 
by  an  amount  in  excess  of  $1,000,000  per 
annum,  comparing  the  fiscal  year  1913 
with  the  fiscal  year  1910,  due  to  increased 
rates  of  pay  and  changes  in  working  con- 
ditions. Approximately  one-half  of  this 
amount,  or  $2,000,000,  is  due  to  advances 
gained  by  the  movement  begun  in  1912, 
and  subsequent  to  the  increases  consid- 
ered by  the  Commission  in  the  1910  inves- 
tigation. This  indicates  in  a  general  way 
what  has  also  taken  place  with  each  of  the 
other  companies.  It  should  be  borne  in 
mind  that  the  wages  paid  on  the  several 
roads  interested  in  this  proceeding  are 
very  nearly  on  the  same  basis,  and  with 
substantially  the  same  working  conditions. 

Since  1910  there  has  been  an  increase 
in  the  cost  of  materials,  due  in  part  to  in- 
creased use  and  higher  standards,  and  in 
part  to  increased  prices  of  certain  mate- 
rials entering  largely  into  the  cost  of  op- 
eration, such  as  fuel  and  track  ties.  The 
advance  in  price  of  these  two  items  alone 
in  the  case  of  the  Baltimore  and  Ohio  Sys- 

9 


tern  served  to  increase  the  expenses  of 
that  Company  in  1913  more  than  half  a 
million  dollars  above  what  they  would 
have  been  had  prices  remained  as  in 
1910. 

Increasing 
Taxes 

The  amount  paid  for  taxes  by  the  Com- 
panies, parties  to  this  proceeding,  has 
shown  constant  increases  during  the  whole 
ten-year  period,  and  particularly  during 
the  last  three  years.  The  increase  pay- 
ment in  1913  over  1903  was  $28,720,000 
and  the  increase  incident  to  the  last 
three  years  was  $11,579,000.  In  the  case 
of  the  three  systems  selected  by  the  Com- 
mission as  typical,  the  amount  of  money 
actually  paid  as  taxes  during  the  year 
1913.  was  $31,216,000,  being  $7,854,000 
more  than  was  paid  in  1910. 

Legislation,  both  State  and  Federal,  en- 
acted during  the  last  ten  years,  has 
brought  steadily  increasing  burdens  upon 
the  carriers.  It  is  not  proposed  to  ques- 
tion the  merits  of  any  of  the  legislation 
referred  to  in  this  connection.  For  the 
present  purpose,  it  is  sufficient  to  say  that 
the  effect  upon  cost  of  operation  has  been 
and  will  be  the  same,  regardless  of  the 
merit  of  the  measure.  Among  the  meas- 
ures which  have  affected  cost  of  opera- 
tion, I  may  mention:  Employers'  liability 
and  compensation  acts,  full  crew  bills,  so- 
called  semi-monthly  pay  laws,  safety  ap- 
pliance and  standardization  of  equipment 
acts,  and  acts  requiring  the  elimination 
of  grade  crossings,  etc.  The  effect  of  the 
so-called  full  crew  laws  alone  has  been  to 
increase  the  expenses  of  these  carriers 
more  than  $4,000,000  per  annum. 

The  public  demands  to-day  a  higher 
standard  of  service  than  ever  before,  and 
while  it  may  be  that  the  wishes  of  the 
public  in  this  particular  have  not  been 

10 


fully  realized,  none  the  less,  much  has 
been  done  in  that  direction,  all  of  which 
is  reflected  in  the  cost  of  operation. 

One  other  very  important  influence 
upon  the  expense  of  railroad  operations, 
when  considered  in  a  broad  sense,  is  the 
higher  rate  of  interest  which  the  compa- 
nies have  been  obliged  to  pay  in  recent 
years  for  new  money  raised  for  improve- 
ment purposes.  It  is  believed  that  in  the 
case  of  the  carriers  particularly  the  cost 
of  new  capital  has  been  made  higher  than 
it  otherwise  would  have  been,  by  the  con- 
stantly narrowing  margin  between  in- 
come and  outgo,  as  it  is  upon  this  margin 
chiefly  that  the  railroads  in  this  territory 
must  rely  as  the  basis  for  raising  addi- 
tional capital. 

Railroads  Feel 
High  Cost  of  Living 

In  short,  the  railroads  have  felt  the 
burden  of  the  increased  cost  of  living, 
like  all  other  enterprises  or  individuals, 
but  unlike  all  others  have  not  been  per- 
mitted so  far  to  raise  their  prices  or  ad- 
just their  charges  in  recognition  of  that 
burden. 

Further,  the  rates  which  were  in  effect 
in  1910  have  not  in  the  aggregate  been 
maintained — that  is  to  say,  while  certain 
increases  have  been  made  during  the  pe- 
riod in  mind,  decreases  have  also  come 
about,  so  that  the  general  basis  of  rates  has 
been  lowered,  to  some  extent  by  orders  of 
the  regulating  commissions,  and  perhaps 
to  an  equal  if  not  greater  extent  by  com- 
mercial conditions  or  influences  beyond 
the  power  of  the  carriers  to  resist.  The 
net  result  of  this  movement  is  indicated 
in  the  statement  that  if  the  same  rates  and 
classifications  which  were  in  effect  in  1910 
had  remained  in  effect  in  1913,  the  freight 
earnings  of  the  Baltimore  and  Ohio  Sys- 
tem, in  the  year  last  mentioned,  would 

11 


have  been  over  $900,000  greater  than  they 
actually  were,  and  the  net  income  would 
have  shown  the  same  increase.  It  should 
be  understood  that  this  tendency  will  con- 
tinue to  lower  the  general  level  of  the  rate 
structure  for  some  time  to  come,  and  it 
should  be  taken  into  account  when  decid- 
ing upon  any  fair  basis  of  rates  for  the 
future. 

Other  Nations  Raising 
Freight  Rates 

In  addition  to  the  actual  reduction  in 
rates,  above  referred  to,  the  continuous  de- 
cline in  the  value,  that  is  to  say  the  pur- 
chasing power  of  money  for  a  number  of 
years  past,  has  had  the  effect  of  dimin- 
ishing still  further  the  burden  of  the  rate 
to  the  shipper,  while  at  the  same  time  in- 
creasing the  burden  of  the  carriers.  This 
influence,  reflected  in  the  higher  cost  of 
operations,  has  been  worldwide,  and  has 
been  recognized  by  rate  advances  recently 
made  by  railroads  in  England,  Italy. 
Switzerland,  Belgium,  Denmark,  Eussia. 
Austria,  Hungary  and  other  countries. 

Having  set  forth  the  results  of  the  op- 
eration of  these  carriers,  to  show  that  the 
revenue  received  upon  the  existing  basis 
of  rates  is  inadequate,  and  having  pointed 
out  some  of  the  causes  which  have  served 
to  bring  about  this  condition, we  come  now 
to  a  consideration  of  what  general  course 
the  carriers  may  pursue  to  meet  the  situ- 
ation. 

If  the  situation  is  as  I  have  shown,  it 
is  clear  that  the  remedy  must  come  from 
such  changes,  or  such  line  of  action  as  will 
serve  to  increase  net  earnings,  and  this  re- 
sult might  be  brought  about  by  one  of 
three  methods  or  by  a  combination  of 
some  or  all  of  them.  A  large  reduction  in 
cost  of  operation — other  conditions  re- 
maining as  at  present — would  produce 
larger  net  earnings.     A  large  increase  in 

12 


gross  earnings,  if  the  additional  business 
could  be  handled  with  the  present  facili- 
ties and  at  present  operating  ratios,  would 
also  result  in  a  larger  net,  and  it  is  obvi- 
ous that  an  increase  in  freight  charges, 
other  conditions  remaining  as  at  present, 
would  bring  about  the  same  result. 

I  do  not  believe  it  will  be  possible  to  ob- 
tain the  necessary  relief  either  by  reduc- 
ing wages  already  in  effect,  or  by  making 
any  very  considerable  reduction  in  the 
number  of  men  employed;  nor  do  I  be- 
lieve it  will  be  possible  to  effect  economies 
in  operation  of  sufficent  magnitude  to 
have  any  saving  effect  upon  the  situation. 
Undoubtedly  further  economies  will  be 
brought  about,  but  it  is  altogether  likely 
that  in  the  future,  as  in  the  past,  they 
will  be  more  than  offset  by  increased 
taxes,  by  the  effect  of  further  legislation, 
which  is  almost  certain  to  come  about, 
and  by  other  unavoidable  increases  in  ex- 
penses. 

Operating 
Economies 

It  appears  from  the  tables  submitted 
that  coincident  with  increased  property 
investment  during  the  past  three  years, 
practically  all  of  the  railroads  in  this  pro- 
ceeding have  largely  increased  the  aver- 
age tractive  power  of  their  locomotives 
and  the  carrying  capacity  of  their  cars, 
and  have  also  made  substantial  increases 
in  their  train  load,  all  of  which  has 
tended  to  more  economical  operation. 
Speaking  more  specifically,  the  Baltimore 
and  Ohio  Company,  having  made  excep- 
tionally large  capital  expenditures  during 
the  period  last  mentioned,  was  enabled  to 
effect  such  increase  in  its  freight  train 
load  as  to  result  in  a  saving  in  the  fiscal 
year  1913  when  compared  with  1910 
of  over  9,000,000  freight  train  miles, 
which,  at  an  estimated  cost  of  fifty  cente 

13 


per  train  mile,  accomplished  a  saving  in 
transportation  costs  of  approximately 
$4,500,000  per  annum.  This  large  saving, 
however,  was  more  than  offset  by  increases 
in  other  expenses,  due  to  causes  which  I 
have  already  mentioned.  I  feel  confident 
that  the  relief  which  is  necessary  if  these 
carriers  are  to  meet  the  standard  sug- 
gested by  the  Commission  in  its  report  I. 
C.  C.  3400  is  not  to  be  found  in  more  ef- 
ficient operation. 

To  Raise  Rates 
Only  Alternative 

We  next  come  to  the  question  of  large 
increase  in  gross  earnings.  Under  cer- 
tain conditions  it  might  properly  be  ex- 
pected that  larger  gross  earnings  would 
give  -increased  net,  but  it  so  happens  that 
the  railroads  involved  in  this  proceeding 
are  located  in  that  part  of  the  United 
States  where  commercial  and  industrial 
development  has  been  most  intense,  and 
it  will  be  shown  that  in  order  to  increase 
the  gross,  earnings  of  these  particular  com- 
panies to  any  great  extent  at  the  existing 
rates,  it  would  be  necessary  for  them  to 
handle  a  volume  of  business  much  beyond 
their  present  carrying  capacity.  It 
would,  therefore,  be  necessary  to  obtain 
and  spend  a  large  amount  of  new  capital 
for  increased  facilities  before  gross  earn- 
ings could  be  greatly  augmented,  and,  as 
has  already  been  shown,  new  capital  in- 
vested in  such  facilities  during  the  last 
three  years  has  generally  failed  to  earn 
any  return  whatever  upon  the  investment. 
For  this  reason  I  do  not  think  we  can 
safely  look  for  relief  in  the  one  direction 
of  increased  gross  earnings,  and  this 
brings  us  to  the  third  remaining  method 
suggested — that  is,  increased  charges,  or 
increased  rates  and  fares. 

Inasmuch  as  the  passenger  fares 
charged   by  these  several  companies   are 

14 


generally  the  result  of  legislative  enact- 
ments, and  the  mail  pay  and  express  rates 
are  also  beyond  the  control  of  the  rail- 
roads, it  will  be  seen  at  once  that  no  im- 
mediate relief  and  perhaps  no  very  con- 
siderable relief  at  any  time,  can  be  ob- 
tained in  these  directions,  and  we  are  con- 
sequently forced  to  consider  an  advance 
of  freight  rates  as  the  one  available  source 
of  increased  earnings.  When  this  same 
question  was  before  the  Commission  in 
case  I.  C.  C.  3400,  it  was  strongly  urged 
by  shippers  who  opposed  the  increase  at 
that  time,  that,  if  it  should  be  shown  that 
the  carriers  did  need  increased  revenue, 
and  if  it  should  also  appear  that  such  in- 
creased revenue  ought  to  be  obtained  by 
increased  freight  rates,  such  advance 
should  not  be  obtained  as  was  then  pro- 
posed, by  a  very  considerable  advance  of 
some  of  the  rates  and  no  advance  of 
others.  It  was  pointed  out  that  the  rate 
structure,  such  as  it  was  at  that  time,  was 
the  result  of  a  long  period  of  competition, 
plus  the  influence  of  many  years  of  State 
and  Federal  regulation,  and  that  com- 
mercial and  industrial  conditions  gener- 
ally had  grown  up  in  harmony  with  the 
existing  structure,  and  it  was  urged  that 
the  relation  of  rates  between  different 
places  and  between  themselves  ought  not 
to  be  violently  or  unnecessarily  disturbed. 
The  force  of  this  argument  has  been  rec- 
ognized by  the  carriers,  and  in  the  present 
instance,  while  it  is  proposed  to  secure  the 
necessary  increased  revenue  by  an  advance 
of  freight  rates,  it  is  also  proposed  that  it 
should  be  obtained  by  an  increase  gener- 
ally of  5  per  cent.,  using  minima  of  five 
cents  per  ton  and  of  one-quarter  of  a 
cent  per  hundredweight,  preserving  so  far 
as  possible  existing  competitive  adjust- 
ments as  between  localities.  This  method 
takes  full  cognizance  of  the  claim  previ- 
ously made  by  the  shippers  that  the  ex- 

15 


isting  rate  structure  should  not  be  un- 
necessarily disturbed  so  far  as  relation  be- 
tween rates  is  concerned. 

The  amount  of  advance,  or  the  percent- 
age of  increase  now  proposed  is,  in  the 
opinion  of  those  who  are  parties  to  this 
movement,  too  small  to  properly  meet  the 
exigencies  of  the  case.  It  was  felt,  when 
the  matter  was  first  discussed,  and  that 
feeling  has  been  strengthened  with  the 
passage  of  time,  that  a  10  per  cent,  in- 
crease of  freight  rates  was  necessary  and 
should  be  requested  at  the  present  time, 
and  while  all  felt  that  10  per  cent,  was 
not  higher  than  the  conditions  justify,  the 
Lesser  advance  of  5  per  cent,  was  finally 
determined  upon,  because  it  was  recog- 
nized that  the  whole  rate  situation  was  a 
matter  of  delicate  relationship,  and  the 
individual  carriers  were  naturally  solici- 
tous that  nothing  should  be  done  to  dis- 
turb the  -free  and  well-established  move- 
ment of  traffic.  An  increase  of  5  per  cent., 
it  was  thought,  would  not  be  large 
enough  to  affect  seriously,  if  at  all,  com- 
mercial adjustments,  and  the  increased 
net  which  would  be  gained  by  such  an 
advance,  while  not  of  itself  equal  to  the 
necessities  of  the  case,  would  in  any  event 
be  of  assistance,  and  most  important  of 
all,  the  general  increase  of  rates  would 
serve  to  direct  attention  to  the  relation- 
ship which  does  and  must  exist  between 
railroad  charges  and  the  total  cost  of  op- 
eration. 

It  was  urged  in  the  previous  hearing 
that  the  carriers  at  that  time  were  unable 
to  show  by  actual  test  that  the  rates  in 
effect  were  insufficient,  and  that  they 
failed  to  show  the  necessity  for  increased 
revenue.  We  believe  that  in  the  present 
case,  the  evidence,  showing  the  need  of  ad- 
ditional revenue,  is  ample.  It  was  sug- 
gested also  that  even  if  additional  revenue 
were  necessary  at  that  time,  the  plan  pro- 
posed was  not  the  right  one  by  which  to 

16 


obtain  it.  The  carriers  accept  that  point 
of  view,  and  now  propose  that  the  in- 
creased revenue  be  obtained  by  an  ad- 
vance of  a  small  percentage  of  all  rates  in 
the  territory  affected.  It  is  believed  that 
the  plan  now  submitted  is  the  fairest  and 
best  one  possible  under  all  the  circum- 
stances. 

In  conclusion:  I  have  shown  that  tend- 
encies, which  have  been  operating  over  a 
period  of  at  least  ten  years,  have  resulted 
in  such  diminishing  net  returns  that  it 
has  gradually  come  about  that  money  in- 
vested in  these  railroads,  because  of  the 
low  average  rates  prevailing  in  so-called 
Official  Classification  territory,  and  for 
other  reasons,  does  not  earn  the  same  re- 
turn as  money  invested  in  other  enter- 
prises of  similar  kind  or 'character.  As  a 
matter  of  fact,  money  so  invested  during 
the  last  three  years,  taken  as  a  whole, 
has  earned  no  return  whatever.  In  view 
of  all  this,  those  responsible  for  the- man- 
agement of  these  properties  would  not  be 
justified  in  continuing  large  expenditures 
of  new  capital  for  additional  facilities  and 
equipment,  even  if  such  capital  were  avail- 
able at  reasonable  rates  of  interest. 

$200,000,000  Capital 
Invested  Each  Year 

I  have  also  shown  that  the  railroads  in 
Official  Classification  territory  have  in- 
creased their  property  investment  for  new 
tracks,  stations,  locomotives,  freight  and 
passenger  cars,  and  for  other  similar  pur- 
poses at  the  rate  of  approximately  $200,- 
000,000  per  annum  during  the  whole  of 
the  last  ten-year  period,  and  it  is  certain 
that  the  continued  annual  expenditure  of 
a  sum  even  greater  than  that  will  be  neces- 
sary for  similar  purposes,  if  the  carrying 
capacity  of  the  railroads  in  this  territory 
is  to  keep  pace  with  the  normal  growth  of 
commerce. 

17 


The  immediate  and  all-important  ques- 
tion is,  How  shall  these  railroads  obtain 
the  new  capital  necessary  if  they  are  to 
provide  the  needed  facilities  and  furnish 
the  high-class  service  which  the  public  in- 
terest demands,  and  to  which  the  public  is 
properly  entitled?  The  answer,  we  think, 
is  to  be  found  in  the  following  words 
which  appear  in  the  report  of  this  Com- 
mission, from  which  I  have  already 
quoted : 

"We  should  allow  such  rates  which  will  yield 
to  this  capital  as  large  a  return  as  it  could 
have  obtained  from  other  investment  of  the 
same  grade.  If  rates  formerly  in  effect  have 
become  insufficient,  then  higher  rates  should  be 
permitted.  Commerce  and  industry  cannot  af- 
ford to  wait  on  transportation  facilities." 


18 


BULLETIN    No.  2 


The  Case  for  Increased  Railroad  Rates 


Statement  on  Behalf  of  Lines 
in  Central  Freight  Association 

Made  before  Interstate  Com- 
merce Commission,  November  24, 
1913, 

By  Frederick  A.  Delano, 
Receiver,  Wabash  Railroad. 


In  the  1910  case  the  Commission  re- 
iterated a  principle  it  had  frequently  ap- 
plied in  previous  cases  involving  the  rea- 
sonableness of  competitive  rates,  which  is 
tersely  stated  in  the  following  sentence 
taken  from  the  Spokane  case: 

"We  must,  therefore,  in  fixing  rates, 
have  regard  not  altogether  to  any  one  par- 
ticular railroad,  but  to  the  whole  situa- 
tion, and  must  consider  the  effect  of  what- 
ever order  we  make  upon  all  these  de- 
fendants." 

In  applying  this  principle  in  the  1910 
case,  the  Commission  held  that  the  Penn- 
sylvania, New  York  Central  and  Balti- 
more and  Ohio  systems  were,  for  the  pur- 
pose of  measuring  the  reasonableness  of 
rates,  fairly  typical  of  the  railroads  in 
Official   Classification  territory.    . 

Mr.  Willard  has  indicated  in  his  state- 
ment that  the  lines  generally  will  offer 
evidence  which  will  show  that  they  are 
now  entitled,  on  the  authority  of  that  rul- 
ing, to  increase  their  rate. 

That  ruling  was  no  doubt  justified  by 
the  evidence  submitted  in  that  case,  but 
we,  who  represent  the  Central  Freight 
Association  lines,  do  not  believe  the  evi- 
dence in  that  case  fully  developed  the 
whole  railroad  situation  in  the  territory. 

We  concur  in  all  that  Mr.  Willard  has 

19 


said  and  believe  the  evidence  will  show 
that  the  systems  I  have  mentioned  con- 
sidered alone  are  entitled  to  an  increase  in 
rates,  but  we  are  not  satisfied  with  the 
ruling  of  the  Commission  that  those  sys- 
tems are  typical  of  the  lines  in  the  terri- 
tory and  believe  that  if  the  ruling  should 
be  affirmed  as  a  fixed  precedent  for  future 
guidance,  its  application  will  cause  irrep- 
arable injury,  not  only  to  them,  but 
also  to  the  people  they  serve,  and  we  have 
accordingly  determined  to  bring  to  the 
attention  of  the  Commission  in  the  pres- 
ent case  evidence  which  we  believe  will 
justify  a  reconsideration  of  the  subject; 
and  I  have  been  delegated  to  briefly  out- 
line that  evidence. 

We  will  participate  with  the  trunk 
lines  in  offering  testimony  on  the  gen- 
eral features  of  the  case  and  will  confine 
our  separate  presentation  to  the  submis- 
sion of  additional  evidence  which,  we  be- 
lieve, will  show  the  ruling  of  the  Commis- 
sion, that  the  systems  I  have  mentioned 
are  fairly  typical  of  the  whole  situation  in 
the  territory,  ought  not  to  become  a  fixed 
precedent,  and  that  the  "whole  situation" 
in  Central  Freight  Association  territory  is 
the  fair  measure  of  the  reasonableness  of 
the  rates  in  that  territory,  and  calls  for 
a  very  subtantial  increase  in  rates. 

Official  Classification 
Territory 

Official  Classification  territory  em- 
braces three  distinct  and  independent  rail- 
road territories  and  rate  zones,  which  we 
will  endeavor  to  show  were  created  in  a 
natural  way  in  the  evolution  and  develop- 
ment of  the  railroad  business  by  economic 
conditions  peculiar  to  each,  but  not  com- 
mon to  two  of  them. 

20 


New  England 
Territory 

First,  we  have  the  New  England  terri- 
tory, which  embraces  the  New  England 
States,  and  contains  an  area  of  approxi- 
mately 64,000  square  miles,  inhabited  by 
approximately  eleven  million  people,  or 
174  inhabitants  to  the  square  mile,  and 
traversed  by  8071  miles  of  railway  lines, 
which  touch  an  average  population,  in- 
cluding New  York  City,  of  1389  per  mile 
of  railroad.  The  population  of  that  terri- 
tory is  dense,  and,  in  the  main,  assembled 
in  large  industrial  centers,  the  rural  pop- 
ulation of  the  New  England  States  being^ 
only  17  per  cent,  of  the  whole  population. 

That  territory  does  not  produce  fuel  or 
other  raw  material,  except  granite,  marble 
and  lumber — and  those  do  not  comprise  a 
substantial  tonnage — and,  while  the  traffic 
is  dense,  it  consists  largely  of  merchan- 
dise, manufactures  and  miscellaneous. 
For  instance,  approximately  45  per  cent, 
of  the  tonnage  of  the  two  principal  rail- 
roads in  that  territory,  during  the  year 
1912,  consisted  of  that  class  of  traffic. 

The  hauls  in  that  territory  are  short. 
Little  traffic  passes  through,  except  im- 
ports and  exports,  and  the  bulk  of  the 
traffic  originating  or  destined  beyond  that 
territory  is  received  from  or  delivered  at 
its  west  boundary  to  lines  running  west 
and  south,  while  the  water-borne  tonnage 
is  largely  hauled  but  short  distances  to  in- 
land towns. 

These  conditions,  and  the  isolated  loca- 
tion of  that  territory  along  the  Atlantic 
seaboard,  water  competition  and  numer- 
ous other  economic  influences  peculiar  to 
it,  which  the  evidence  will  bring  out  more 
in  detail,  have  created  a  railroad  territory 
and  fabric  of  rates  and  traffic  conditions 
peculiar  to  it  and  independent  of  the  West 
and  South. 

21 


Trunk  Line 
Territory 

We  have  next  the  Trunk  Line  territory, 
which  embraces  the  area  west  of  the  Hud- 
son River  and  Atlantic  seaboard,  north 
of  the  Potomac  River  and  east  of  what  is 
known  as  the  "Western  Termini" — a  line 
extending  from  Buffalo  through  Pitts- 
burgh to  the  Ohio  River.  This  territory 
embraces  an  area  of  112,000  square  miles, 
and  has  a  population  of  twenty-one  mil- 
lion, or  207  inhabitants  to  the  square  mile, 
and  is  traversed  by  23,777  miles  of  rail- 
way lines,  which  touch  an  average  popula- 
tion of  889  per  mile  of  railroad. 

As  in  the  New  England  territory,  the 
population  in  the  Trunk  Line  territory  is 
found  largely  in  its  great  cities — the  rural 
population  of  the  States  included  in  the 
territory  being  only  30  per  cent,  of  the 
whole. 

The  area  and  population  of  this  terri- 
tor}r  are  greater  than  the  area  and  popula- 
tion of  the  New  England  territory,  but 
the  area  per  mile  of  railroad  is  only  about 
one-half,  which  indicates  that  the  former 
is  more  amply  supplied  with  railroad 
transportation  facilities  than  the  latter. 
While  the  population  per  mile  of  railroad 
is  greater  in  New  England  territory  than 
in  Trunk  Line  territory,  the  tonnage  in 
the  latter,  per  mile  of  railroad,  is  approx- 
imately twice  the*tonnage  in  the  former. 
The  character  of  the  traffic  is  likewise  sub- 
stantially different  in  the  two  territories. 
For  instance,  the  combined  tonnage  of 
products  of  mines  carried  by  the  Pennsyl- 
vania Railroad  proper,  the  New  York 
Central  proper,  and  the  Baltimore  and 
Ohio  System  in  1912  was  approximately 
ten  times  the  same  class  of  tonnage  car- 
ried by  the  two  principal  railroads  of  New 
England.  That  class  of  tonnage  com- 
prised 66  per  cent,  of  the  total  tonnage  of 
the  Pennsylvania  and  the  Baltimore  and 

22 


Ohio,  but  only  30  per  cent,  of  the  total 
tonnage  of  the  two  New  England  roads. 

The  evidence  will  show  that  Trunk 
Line  territory  comprises  relatively  the 
largest  population  per  square  mile,  the 
greatest  industrial  activity  and  the  dens- 
est traffic  of  any  similar  area  in  the  coun- 
try. It  embraces  the  great  manufactur- 
ing centers  of  New  York,  New  Jersey  and 
Pennsylvania,  and  the  Pittsburgh  district 
— the  greatest  tonnage  center  in  the 
world. 

In  the  early  history  of  railroad  build 
ing  in  that  territory,  the  railroads  were 
built  westward  from  New  York  and  other 
Atlantic  seaboard  cities  on  the  south,  and 
either  terminated  at  Buffalo,  on  the  lakes, 
or  at  Ohio  Eiver  cities.  The  rates  were 
made  applicable  to  these  lines  as  originally 
constructed,  and  the  character  of  the 
traffic,  physical  surroundings  and  other 
economic  influences,  which  we  will  point 
out  more  in  detail  in  the  evidence,  built 
up  and  have  preserved  to  this  day  a  rail- 
road territory  and  a  fabric  of  rates  and 
traffic  conditions  peculiar  to  it  and  inde- 
pendent of  and  distinct  from  the  territory 
east,  west  and  south  of  it. 

Central  Freight  Association 
Territory 

The  remainder  of  Official  Classification 
territory — the  vast  area  extending  from 
Trunk  Line  territory  to  the  Mississippi 
River  and  the  lakes — comprises  what  is 
known  as  Central  Freight  Association  ter- 
ritory. 

The  portion  of  that  territory  in  the 
United  States  contains  an  area  of  approx- 
imately 186,000  square  miles,  inhabited 
by  about  nineteen  millions  of  people,  or 
122  inhabitants  to  the  square  mile,  as 
compared  with  207  in  Trunk  Line  terri- 
tory and  174  in  New  England  territory, 
mix!   is  traversed  by  35,849  miles  of  rail- 

23 


road,  which  touch  an  average  population 
of  506  per  mile  of  railroad,  as  compared 
with  889  in  Trunk  Line  territory  and 
1389  in  New  England  territory. 

It  will  be  noted  that,  while  this  terri- 
tory contains  two  million  less  population 
than  Trunk  Line  territory,  its  area  is  74,- 
000  square  miles  greater,  and  is  traversed 
by  12,072  more  miles  of  railroad,  and 
while  it  contains  about  eight  million  more 
inhabitants  than  New  England  territory, 
it  comprises  more  than  three  times  the 
area  and  is  traversed  by  27,778  more 
miles  of  railroad. 

The  population  of  the  principal  States 
in  Central  Freight  Association  territory 
is  about  equally  divided  between  the  cities 
and  the  rural  sections,  the  percentage  of 
rural  population  being  46  per  cent,  of  the 
whole.  But  it  does  not  follow  that  it  has 
too  many  railroads  or  too  much  mileage, 
because,  as  we  have  seen,  the  population 
is  thinly  spread  over  186,000  square  miles, 
as  compared  with  a  two-million  greater 
population  in  Trunk  Line  territory  as- 
sembled on  112,000  square  miles,  and  only 
eight  millions  less  population  in  New 
England  territory  assembled  on  64,000 
square  miles. 

The  traffic  in  this  territory  is  diversified 
and  very  general  in  character,  and  is  sub- 
stantially different  in  many  respects  from 
the  traffic  in  the  other  territories. 

Special  Nature  of 
Middle  West  Railroads 

This  territory  was  created  largely  by 
physical  conditions  and  natural  develop- 
ment and  growth  of  population.  Its  nu- 
merous lakes  and  rivers,  some  'of  which 
form  its  boundaries,  attracted  to  their 
borders  the  early  settlements  and  cities, 
and  in  time  came  Chicago  and  St.  Louis, 
its  two  chief  centers  of  population.     The 

24 


territory  is  comparatively  level,  which  fa- 
cilitated railroad  building,  and  as  popu- 
lation increased,  railroads  were  con- 
structed in  all  directions,  the  objective 
points  being,  naturally,  lake  and  river 
cities. 

It  is  a  well-known  fact  that  in  the  de- 
velopment of  that  territory  water  compe- 
tition has  always  been  an  important  fac- 
tor, and  that  the  railroads  have  promoted 
the  growth  of  population  and  industrial 
development  by  low  rates.  Again,  rail- 
road building  at  times  has  been  in  ex- 
cess of  the  growth  of  the  country,  and 
caused  abnormal  competition,  resulting 
in  lower  rates. 

At  the  time  the  Government  entered 
upon  the  regulation  of  rates,  those  pre- 
vailing in  Central  Freight  Association 
territory,  as  a  body,  were  comparatively 
the  lowest  rates  prevailing  in  any  section 
of  the  country,  and  in  recent  years  they 
have  been  still  further  reduced — and 
especially  passenger  fares,  which  have 
been  reduced  from  3  to  2  cents  per  mile, 
or  33  1-3  per  cent. — in  all  the  States  in 
that  territory. 

The  influences  I  have  mentioned,  which 
we  will  show  in  detail  in  the  evidence, 
have  resulted  in  the  bankruptcy  of  a  sub- 
stantial portion  of  the  railroad  mileage 
in  the  territory  and  in  depleting  the  earn- 
ings and  debilitating  the  credit  of  the 
remaining  lines  to  an  extent  which,  un- 
less relieved  by  prompt  and .  substantial 
advances  of  rates,  will  naturally  result  in 
impeding  the  commerce  and  transporta- 
tion of  that  section  of  the  country. 

On  the  evidence,  we  will  urge  that, 
owing  to  the  different  conditions  existing 
in  these  three  component  parts  of  Official 
Classification  territory,  lines  traversing 
two  of  these  sections  ought  not  to  be  re- 
garded as  typical  of  the  whole  situation 
in  the  territory  or  in  the  component 
parts,     tfndoubtedly   a  great  many  im- 

25 


portant  considerations  are  common  to  all 
the  lines  in  the  three  component  parts, 
and  accordingly  the  showing  of  the  Penn- 
sylvania, Baltimore  and  Ohio  and  New 
York  Central  Systems  will  be  of  great 
value  to  the  Commission.  We  do  not 
mean  to  disparage,  or  in  any  way  dis- 
credit, the  showing  of  those  systems,  but 
merely  contend  that  their  showing  is  not 
conclusive  or  typical  of  the  entire  situa- 
tion. 

Grouping  of  Lines  in 
C.  F.  A.  Territory 

We  believe  it  will  be  pertinent  to  show 
the  conditions  prevailing  in  Central 
Freight  Association  territory,  and  will, 
therefore,  offer  in  evidence,  among  other 
things,  statements  of  the  mileage,  earn- 
ings and  results  of  operation  of  the  lines 
located  therein,  with  a  view  of  indicating 
the  "whole  situation"  in  that  territory. 

There  are,  in  the  territory,  35,849 
miles  of  railroad  (exclusive  of  the 
mileage  of  switching  and  terminal  com- 
panies)   owned  by  93   companies. 

We  have  omitted  switching  and  ter- 
minal companies  because  they  perform  a 
special  service  on  an  arbitrary  basis,  gen- 
erally fixed  on  a  per-car  rate. 

The  mileage,  however,  includes  the 
mileage  in  C.  F.  A.  territory  of  the 
Mobile  and  Ohio;  St.  Louis,  Iron  Moun- 
tain and  Southern;  Louisville  and  Nash- 
ville ;  Southern  Railway ;  St.  Louis  South- 
western; Chicago,  Burlington  and  Quincy, 
and  Norfolk  and  Western — 1892  miles, 
or  5.3  per  cent,  of  the  total — but  we 
exclude  that  mileage  from  our  figures, 
because  it  is  only  7  per  cent,  of  the 
mileage  of  those  companies,  and  the 
results  of  their  operation  cannot  be  segre- 
gated. As  93  per  cent,  of  the  mileage 
of  these  companies  is  in  higher  rate  zones, 
it  is  obvious  that  the  operations  of  these 
companies  as  a  whole  would  •  be  im- 
material. 

26 


This  leaves  33,957  miles  of  railroad, 
or  94.7  per  cent,  of  the  total,  in  the  terri- 
tory. 

In  presenting  our  figures  we  will  be 
obliged  to  add  to  that  mileage  the  results 
of  the  operation  of  264  miles  of  the  Chi- 
cago and  Alton,  2628  miles  of  the  Illinois 
Central,  and  859  miles  of  the  Wabash. 
The  principal  operation  of  these  three 
companies'  is  in  the  territory,  the  3751 
miles  outside  being  west  of  the  Missis- 
sippi River  or  south  of  the  Ohio  River, 
in  higher  rate  zones,  and  we  include  them 
because  the  results  of  operation  of  the 
mileage  in  the  territory  cannot  be  segre- 
gated. 

We  will  also  include  3401  miles  of  the 
Baltimore  and  Ohio  and  Erie,  which  are 
located  in  Trunk  Line  territory,  because 
the  operation  of  this  mileage  cannot  be 
segregated  from  their  lines  in  the  terri- 
tory. 

Special  Grouping  of 
C.  F.  A.  Railroads 

Our  figures  will,  therefore,  embrace 
the  results  of  operation  of  41,109  miles 
of  railroad,  and  we  will  arrange  them  in 
four  groups: 

Group  One — embraces  the  41,109  miles 
of  railroad  I  have  mentioned,  except 
6443  miles  of  Erie  Lines  east  of  Marion, 
Ohio,  and  the  B.  and  0.  System,  and 
2729  miles — the  aggregate  mileage  of  46 
short  railroads  in  the  territory  which, 
together,  earned  less  than  eight  million 
dollars  in  1910. 

Group  Two — embraces  the  Erie  Lines 
east  of  Marion,  Ohio,  and  B.  and  O. 
System,  aggregating  6443  miles,  3401  of 
which  are  located  in  Trunk  Line  territory. 
This  mileage  is  grouped  together  because 
the  results  of  operation  of  the  mileage 
in  C.  F.  A.  territory  cannot  be  segregated. 

Group  Three — embraces  28  of  the  38 
roads  in  Group  One,  with  an  aggregate 
mileage  of  23,167  miles,  which  includes 

27 


19,416  miles,  or  51>4  per  cent,  of  the 
entire  mileage  in  the  territory,  and  em- 
braces such  important  lines  as  the  Big 
Four  System;  the  Vandalia;  the  Chicago 
and  Eastern  Illinois ;  Nickel  Plate ;  Grand 
Trunk  Western;  Grand  Rapids  and 
Indiana;  Pere  Marquette;  Cincinnati, 
Hamilton  and  Dayton;  Illinois  Central; 
Chicago  and  Alton,  and  Wabash. 

Group  Four — embraces  46  companies 
with  an  aggregate  mileage  of  2729  miles, 
or  7^2  per  cent,  of  the  total  mileage  in 
the  territory,  which,  together,  in  1910 
earned  less  than  eight  million  dollars. 
These  roads  are  important  factors  in  the 
development  and  commerce  of  the  re- 
spective communities  they  serve,  but,  as 
a  rule,  they  are  in  great  financial  distress, 
and,  being  short  lines,  we  thought  it 
natural  to  group  them  together. 

Lines  Representing  the 
Whole  Situation 

We  believe  that  Group  Three  embraces 
lines  which  are  fairly  representative  of 
the  whole  railroad  situation  in  the  terri- 
tory, and  for  that  reason  we  will  refer 
to  it  in  some  detail. 

We  have  omitted  from  this  group  the 
main  line  connections  of  the  Trunk  Line 
Systems — the  Lake  Shore,  the  Michigan 
Central,  the  Pennsylvania  Company  and 
the  Panhandle— although  the  figures  will 
show  that  their  prosperity  has  been  sub- 
stantially impaired  during  the  last  few 
years  by  a  constantly  increasing  ratio  of 
expense  to  earnings. 

The  fact,  however,  that  this  mileage 
as  a  whole  was  constructed  at  a  very  low 
capital  charge  and  forms  integral  parts 
of  the  best  and  strongest  railway  systems 
of  the  country,  to  say  nothing  of  the 
credit  and  business  they  have  enjoyed 
from  their  affiliations  and  the  returns  on 
their  outside  investments,  place  them  in 
a  class  by  themselves.    These  facts  (which 

28 


will  be  shown  more  in  detail  in  the  evi- 
dence) will  conclusively  prove  that,  while 
those  lines,  no  doubt,  need  an  increase  in 
rates,  they  do  not  belong  in  the  group 
of  railroads  which  fairly  represents  the 
railroads  in  the  territory. 

We  have  also  excluded  from  Group 
Three  the  Pittsburgh  and  Lake  Erie, 
Bessemer  and  Lake  Erie,  Hocking  Valley, 
Kanawha  and  Michigan,  Toledo  and  Ohio 
Central  and  Wheeling  and  Lake  Erie. 
These  roads  are  located  in  a  comparatively 
small  area  between  the  Great  Lakes  and 
the  iron  furnaces  and  coal  mines  of  Ohio 
and  their  traffic  is  not  of  a  general  nature, 
but  substantially  confined  to  the  products 
of  mines;  their  tonnage  of  these  products 
during  1912  being  78.6  per  cent,  of  their 
entire  tonnage,  but  the  exceptional  fea- 
ture of  their  situation  lies  not  only  in 
the  volume  of  this  mineral  traffic,  but  in 
the  fact  that  by  reason  of  hauling  iron 
ore  in  one  direction  and  coal  in  the  re- 
verse way,  they  have  a  balanced  traffic, 
which  produces  an  unusually  favorable 
operating  condition. 

While  these  lines  are  within  the 
boundaries  of  the  territory,  they  do  not 
enter  into  the  general  railroad  situation 
and  cannot  be  included  in  a  group  of 
roads  fairly  representative  of  all  the  rail- 
roads in  the  territory. 

We  have  also  excluded  from  Group 
Three  the  46  short  lines  whose  aggregate 
earnings  for  1910  were  less  than  eight 
million  dollars,  because,  as  we  have  said, 
those  lines  are  short,  their  earnings  are 
small,  and  they  are,  as  a  rule,  in  financial 
distress  and  ought  not  to  be  included  in 
a  group  of  roads  representative  of  the 
railroads  in  the  territory. 

We  have  included  in  Group  Three  28 
companies,  with  an  aggregate  mileage  of. 
23,167  miles,  which  traverse  all  parts  of 
the  territory  and  participate  in  the  gen- 
eral traffic  of  that  section  of  the  country. 

29 


We  believe  a  mere  glance  at  the  map 
of  this  large  mileage  (23,167  miles)  will 
indicate  that  it  is  fairly  representative  of 
the  territory.  In  any  event,  we  may  be 
assured  that  if  this  mileage  is  not  in- 
fluential in  determining  the  reasonable- 
ness of  rates,  the  prosperity,  commerce 
and  development  of  the  whole  territory 
will  be  placed  in  jeopardy. 

Salient  Facts  From 
the  Evidence 

On  the  evidence  we  will  present,  in 
detail,  our  contentions,  but  my  present 
purpose  will  be  served  by  merely  calling 
your  attention  to  a  few  salient  facts. 

This  great  network  of  railroads  cover- 
ing the  entire  territory,  during  the  year 
ending  June  30,  1910,  earned  239  million 
dollars,  and  during  the  year  ending  June 
30,  1913,  275  million  dollars,  or  a  gross 
increase  of  about  36  million  dollars;  but 
in  the  former  year  the  operating  expenses 
and  taxes  were  182  million  dollars,  and 
in  the  latter  year  227  million  dollars,  or 
an  increase  in  expenses  of  about  45  mil- 
lion dollars,  resulting  in  a  decrease  in  net 
revenues,  after  payment  of  taxes,  of  over 
nine  million  dollars,  and  in  net  corporate 
revenue  of  more  than  16  million  dollars. 

As  stated  in  other  words,  the  ratio  of 
operating  expenses  and  taxes  to  earnings, 
during  the  same  period,  increased  from 
76.3  per  cent,  to  82.8  per  cent. 

These  same  roads,  during  the  year  end- 
ing June  30,  1908  (which  will  be  remem- 
bered as  a  panic  year),  earned  212  million 
dollars,  and  during  the  year  ending  June 
30,  1913,  275  million,  or  an  increase  of 
63  million;  but,  during  the  year  ending 
June  30,  1908,  the  operating  expenses 
and  taxes  were  165  million,  and  the  year 
ending  June  30,  1913,  227  million— an 
increase  of  about  62  million. 

30 


Net  Corporate  Income  Decreasing 

Now,  despite  the  fact  that  during  that 
same  period  more  than  175  million  dollars 
were  put  into  additions  and  betterments, 
the  net,  after  deducting  operating  ex- 
penses and  taxes,  showed  an  increase  of 
only  $800,000,  while  the  net  corporate 
income  actually  decreased  about  eight 
million  dollars. 

As  we  have  shown,  this  mileage  com- 
prises 51^2  per  cent,  of  the  entire  mileage 
in  the  territory,  and  if  we  add  the  mileage 
of  the  46  short  railroads,  we  will  have 
59.1  per  cent,  of  the  entire  mileage  of 
the  territory,  all  of  which  is  in  a  deplor- 
able financial  condition. 

While,  as  we  have  said,  the  evidence 
will  show  the  lines  embraced  in  Group 
Three  are  fairly  representative  of  the 
whole  situation  in  the  territory,  the  lines 
embraced  in  Group  One  show  a  result 
almost  equally  deplorable,  especially  in 
the  last  few  years. 

Group  One,  as  we  have  seen,  embraces 
78.6  per  cent,  of  the  entire  mileage  in  the 
territory,  including  all  the  strong  lines, 
and  besides,  3751  miles  outside  of  the 
territory  in  higher  rate  zones;  and  ex- 
cludes only  the  46  short  lines  which  are 
in  financial  straits,  and  the  Erie  east  of 
Marion,  Ohio,  and  the  B.  and  O.  System, 
and  the  short  projections  of  southern 
lines  into  the  territory. 

Group  One,  in  the  fiscal  year  1910. 
earned  $457,000,000,  and  in  the  fiscal 
year  1913,  $533,000,000,  or  showed  an 
increase  of  $76,000,000,  but  operating  ex- 
penses and  taxes  during  the  former  year 
were  $329,000,000,  and  during  the  latter 
year,  $417,000,000,  or  an  increase  in 
expenses  and  taxes  of  $88,000,000,  result- 
ing in  a  decrease  in  net  revenue,  after 
deducting  operating  expenses  and  taxes, 
of  $12,000,000,  and  a  decrease  in  net  cor- 
porate income  of  $17,500,000. 

These  large   decreases  resulted  in  the 

31 


face  of  the  investment  of  vast  sums  of 
new  money  for  additions  and  betterments 
— in  other  words,  notwithstanding  the  in- 
vestment of  this  new  capital,  the  ratio  of 
operating  expenses  to  gross  revenue  in- 
creased from  72  per  cent,  in  1910  to  78.2 
per  cent,  in  1913. 

Latest  Figures  Less  Encouraging 

The  figures  for  the  first  two  months 
of  the  present  fiscal  year  are  still  less 
encouraging;  for  instance,  the  net 
revenue,  after  deducting  operating  ex- 
penses and  taxes  of  the  lines  in  Group 
One  for  the  two  months  mentioned,  de- 
creased about  $4,500,000  as  compared 
with  the  same  two  months  last  year,  while 
the  decrease  of  the  lines  in  Group  Three 
was  about  $2,000,000  as  compared  with 
the  same  months  last  year. 

The  evidence  will  show  that  the  lines 
in  Central  Freight  Association  territory 
are  confronted  with  the  expenditure  in 
the  near  future  of  millions  of  dollars  in 
the  separation  of  grades  in  various  cities, 
on  which  they  will  receive  no  adequate 
return,  and  many  of  the  lines  have  not 
the  credit  to  raise  this  money.  This  cir- 
cumstance, in  view  of  the  present  con- 
ditions of  the  roads,  presents  a  serious 
situation  which  calls  for  prompt  relief. 

It  will  be  obvious  from  the  evidence 
that  a  5  per  cent,  increase  in  rates  will 
not  be  adequate  to  meet  the  demands  of 
the  territory.  As  I  huve  said,  the  rates 
in  that  territory,  both  freight  and  pas- 
senger, are  the  lowest  rates  prevailing  in 
the  United  States,  and  the  interests  of 
the  people  of  that  rapidly  growing  and 
developing  section  of  the  country,  to  say 
nothing  of  the  carriers,  require,  in  the 
near  future,  a  readjustment  of  the  rates, 
both  freight  and  passenger,  to  a  basis 
which  will  enable  that  territory  to  have 
good  railroads  and  the  people  to  have 
efficient  and  adequate  service,  and  to 
progress  measurably  with  the  other  sec- 
tions of  the  country. 

32 


IULLE.I   1IN        INO.      J 


The  Case  for  Increased  Railroad  Rates 


How  the  Demand  for  Railroad 
Facilities  Has  Increased 

December  3,  1913. 

The  railroads  of  the  Eastern  District 
now  applying  for  a  5  per  cent,  increase  in 
freight  rates  have  filed  with  the  Interstate 
Commerce  Commission  a  statistical  ex- 
hibit showing  the  growth  of  population, 
railway  building  and  railway  traffic  dur- 
ing the  past  decade. 

*     *     *     * 

The  territory  from  which  these  statistics 
have  been  drawn  is  substantially  that  part 
of  the  United  States  east  of  the  Missis- 
sippi River  and  north  of  the  Potomac  and 
Ohio  Rivers. 

Railroad  Building 

1.  There  are  some  forty-nine  railway 
systems  in  this  territory,  and  in  1903 
they  were  operating  *55,706  miles  of  line. 
This  does  not  include  double  trackage  or 
sidings — merely  the  distance  between  ter- 
minals. In  the  decade  succeeding — that 
is,  through  the  year  1912 — the  increase  in 
new  line  was  only  3619  miles,  or  about  362 
miles  a  year;  less  than  one  mile  a  day 
over  this  immense  territory.  Reduced  to 
a  percentage,  the  increase  amounted  to 
61/2  per  cent. 

In  1909  and  1910  only  52  miles  and  199 
miles  respectively  of  new  line  were  con- 
structed. While  the  percentage  of  increase 
of  1912  over  1903  was  6y2,  that  of  1912 
over  1910  had  dropped  to  less  than  iy2 
per  cent. 

During  the  period  of  ten  years  these  49 
railroad     systems     double-tracked  —  or, 

*  All  statistics  in  this  exhibit  were  taken  direct  from  Interstate 
Commerce  Commission  records. 

33 


where  there  were  double  tracks,  added  a 
third  or  fourth  track — over  10,465  miles 
of  track,  or  an  average  of  almost  1050 
miles  a  year.  Thus  they  had  154  per 
cent,  more  double  trackage  in  1912  than 
in  1903,  although  the  increase  of  1912 
over  1910  was  but  3.54  per  cent. 

In  1903  these  systems  had  a  total  of 
95,349  miles  of  all  kinds  of  tracks,  in- 
cluding double  tracks,  yard  switching 
tracks  and  sidings.  This  had  grown  to 
115,683  miles  by  1912 — an  increase  of 
214  per  cent.,  or 'an  average  increase 
of  2000  miles  a  year.  The  increase  of 
1912  over  1910,  however,  was  only  4.17 

per  cent. 

*     *     *     * 

POPULATION 

2.  The  population  of  this  section  of  the 
United  States  was,  in  1903,  36,381,924. 
By  1912  it  had  increased  by  more  than  six 
millions — an  annual  average  growth  of 
612,000.  The  population  in  1912  was 
almost  17  per  Gent,  greater  than  in  1903; 
and  in  1912,  3.62  per  cent,  in  excess  of 
what  it  had  been  in  1910— i.  e.,  41,021,267 
as  against  42,508,230. 

Thus,  in  ten  years'  time  these  same 
railroads  had  come  to  have  117  persons 
to  serve  where  previously  they  had  had 
100.  They  had  but  106*  miles  of  new 
extension  track  as  compared  with  every 
100  miles  in  1903.  They  had  115  miles 
of  double  trackage  for  every  100  miles 
they  had  had,  and  121  miles  of  track  fa- 
cilities as  compared  with  100  miles  in 
1903. 

In  other  words,  the  17  per  cent,  of  in- 
creased population  in  this  decade,  while  it 

34 


found  an  increase  of  15  per  cent,  of  double 
trackage  and  21  per  cent,  of  tracks  of  all 
kinds,  had  had  built  for  it  only  6y2  per 
cent,  of  new  line. 

These  miles  of  double,  third  and  fourth 
tracks  and  sidings  constituted  the  em- 
phatic note  in  this  decade,  and  drew  at- 
tention to  the  intensive  development  of 
the  railroads  rather  than  the  extension  of 
their  lines. 

3.  Railway  traffic,  both  freight  and  pas- 
senger, increased  much  faster  than  the 
facilities  for  handling  either.  In  1903  the 
freight  traffic  amounted  to  carrying  one 
ton  of  freight  93,948,275,807  miles,  or,  to 
reduce  it  to  an  almost  incomprehensible 
comprehensibility,  this  ton  of  freight, 
could  such  a  thing  have  been  possible, 
might  have  made  almost  four  million  odd 
trips  around  the  globe. 

In  1912  these  49  railway  systems  were 
transporting  one  ton  of  freight  143,803,- 
436,298  miles,  which  means  that  the  ton 
of  freight  had  gained  the  right  to  about 
two  million  additional  world-girdling 
trips.  The  increase  of  the  year  1912  over 
the  year  1903  was  53  per  cent.  The  an- 
nual average  increase  of  the  second  half 
of  the  decade  over  the  first  half  was  22 
per  cent. 

The  passenger  traffic  in  1903  was  the 
equivalent  of  carrying  one  passenger  10,- 
985,949,080  miles.  In  the  supposititious 
case  of  globe  girdling  this  passenger  would 
have  been  carried  around  the  globe  400,- 
000  times — i.  e.,  the  railroad  transporta- 
tion in  that  year  was  equal  to  carrying 
400,000  passengers  once  around  the  world. 

35 


The  passenger  traffic  in  1912  had  in- 
creased 41*  per  cent.,  which  means  that 
the  lone  passenger  was  now  carried  15,- 
578,111,594  miles;  or  another  load  of 
about  200,000  passengers  had  been  added 
to  the  railroad  animal  globe-encircling 
trip. 

The  passenger  traffic  also  saw  an  in- 
crease of  203  per  cent,  in  the  annual  aver- 
age of  1908-1912  over  1903-1907. 

The  freight-traffic  increase  correspond- 
ingly was  221  per  cent.  As  the  percent- 
age of  increasee  of  freight  traffic  in  1912 
over  1910  was  3.69,  passenger  traffic  grew 
more  rapidly,  since  it  attained  an  increase 
of  more  than  5  per  cent. 

Thus,  as  compared  with  an  increase  of 
17  per  cent,  in  population  between  1903 
and  1912,  the  freight  traffic  increased  53 
per  cent,  and  the  passenger  traffic  42  per 
cent.  In  other  words,  freight  traffic  in- 
creased three  times,  and  passenger  traffic 
more  than  twice,  as  fast  as  population. 

Between  1910  and  1912  the  rate  of  in- 
crease in  freight  traffic  was  slightly  greater 
than  the  growth  of  population,  while  the 
rate  of  increase  in  passenger  traffic  was 
almost  twice  as  great  as  that  of  popula- 
tion. 

In  presenting  the  case  of  the  railroads 
to  the  Commission,  Mr.  Daniel  Willard, 
President  of  the  Baltimore  and  Ohio  Rail- 
road Company,  commented  on  this  situa- 
tion in  these  words: 

"The  railroads  in  Official  Classifica- 
tion territory  have  increased  their 
property  investment  for  new  tracks, 
stations,  locomotives,  freight  and  pas- 
senger cars,  and  for  other  similar  pur- 
Mr, 


poses  at  the  rate  of  approximately 
$200,000,000  per  annum  during  the 
whole  of  the  last  ten-year  period,  and 
it  is  certain  that  the  continued  an- 
nual expenditure  of  a  sum  even 
greater  than  that  will  be  necessary 
for  similar  purposes  if  the  carrying 
capacity  of  the  railroads  in  this  terri- 
tory is  to  keep  pace  with  the  normal 
growth  of  commerce. 

"The  immediate  and  all-important 
question  is,  How  shall  these  railroads 
obtain  the  new  capital  necessary  if 
they  are  to  provide  the  needed  facili- 
ties and  furnish  the  high-class  service 
which  the  public  interest  demands,  and 
to  which  the  public  is  properly  en- 
titled!" 


37 


Compilation  in  matter  of  application  of  Eastern 
railways  for  increase  in  height  rates,  1913. 

Comparison  of  Increase  in  Population,  Railway  Mileage, 

and  Railway  Traffic,  Railways  in  the  Eastern 

District,  Fiscal  Years  1903  to  1912. 


Population 

Railway  Mileage  Operated 

Railway  Traffic 

Year 

Miles 
of 
Line 

Miles  of 
Main 
Track 

Miles  of 

All 

Tracks 

Ton-Miles 

Pass'r-Miles 

1903 

36,381,924 

55,706 

68,262 

95,349 

93,948,275,807 

10,985,949,080 

1910 

41,021,267 

58,499 

76,037 

111,051 

138,692,142,554 

14,825,472,236 

1912 

42,508,230 

59,325 

78,727 

115,683 

143,803,436,298 

15,578,111,594 

Annual 

Average 
1903-1912 

39,395,592 
37,707,450 

57,760 
56,863 

73,811 
71,095 

106,347 
101,044 

119,394,875,236 
107,471,361,160 

13,433,849,976 
12,176,229,355 

1908-1912 

41,083,734 

58,656 

76,528 

111,651 

131,318,389,312 

14,691,470,596 

Per  Cent. 

of  Increase 

1912  over  1903 

16.84 

6.50 

15.33 

21.33 

53.07 

41.80 

1912  over  1910 

3.62 

1.41 

3.54 

4.17 

3.69 

5.08 

Annual  average 

1908-1912 

over 

1903-1907 

8.95 

3.15 

7.64 

10.50 

22.19 

20.66 

Authorities :  Prepared  by 

Reports  of  the  Bureau  of  the  Census.  Bureau  of  Railway  Economics 
Returns  of  the  Railways  to  the  Interstate  Washington,  D.  C 

Commerce  Commission. 

Explanatory  Note 

The  population  figure  shown  for  1910  is  drawn  from  official  compilations  of  the. 
Thirteenth  Census  ;  those  for  the  other  years  are  estimates  based  upon  the  rate  of  popu- 
lation growth  between  1900  and  1910.  The  method  underlying  these  estimates  is  that  of 
the  Census  Bureau  itself.  The  railway  statistics  of  this  table  are  those  of  the  forty-nine 
railway  systems  covered  by  the  compilations  of  the  Bureau  of  Railway  Economics. 


:<8 


ULLETIN    NO.  4 


The  Case  for  Increased  Railroad  Rates 


Railroad  Expenses  Increase 
Faster  than  Earnings 

December  4,  1913. 

Expenses  have  increased  so  much  faster 
than  revenues  that  the  net  operating  in- 
come of  Eastern  railroads  for  1913  was 
$16,311,000  less  than  it  was  in  1910,  and 
this  notwithstanding  the  fact  that  more 
than  $650,000,000  of  new  money  has  been 
put  into  these  railway  properties  in  that 
time. 

This,  in  brief,  coupled  with  the  present 
difficulty  of  obtaining  new  capital,  is,  in  a 
word,  the  railroad  case  for  increased  rates. 
Details  are  presented  in  an  elaborate  sta- 
tistical compilation  submitted  to  the  In- 
terstate Commerce  Commission  by  the 
railroads  interested. 

1.  The  revenue  or  money  received  from 
the  operation  of  these  railroad  systems 
had  attained  the  sum  of  $1,205,155,435 
in  1910.  The  increase  in  1911  was  some 
$14,000,000,  while  1912  held  the  gain  and 
added  to  it  $38,000,000.  In  1913  this 
revenue  had  grown  to  $1,386,073,429. 
This  showed  an  increase  in  revenue  of 
$181,000,000  for  1913  over  1910,  or  in  a 
matter  of  three  years  time. 

The  largest  item  in  this  revenue  was, 
of  course,  that  derived  from  carrying 
freight.  This  was,  in  1910,  $860,403,390. 
Passenger  fares  collected  amounted  to  a 
little  less  than  one-third  of  this  sum,  or 
$260,234,927.  To  avoid  the  constant  rep- 
etition of  large  figures,  the  increased  re- 
ceipts from  freight  charges  were,  suc- 
cessively, in  1912  and  1913,  over  each 
preceding  year,   $30,000,000    and   $105,- 

39 


000,000,  while  1911  decreased  over  1910 
$3,000,000,  while  in  the  same  years  the 
passenger  department  receipts  increased 
$14,000,000,  $5,000,000  and  $14,000,000. 
Thus,  passenger  and  freight  receipts  were 
in  the  year  1913,  $165,000,000  in  excess 
of  what  they  had  been  in  1910. 

To  show  what  each  mile  of  track  was 
earning  in  each  of  these  years,  it  can  be 
said  that  the  return  was  $20,611  for  each 
mile  in  1910,  and  that  in  1911,  1912  and 
1913  the  amounts  respectively  were  $20,- 
850,  $21,271  and  $23,430.  Separating 
them  again  for  the  four  successive  years, 
the  freight  returns  for  each  mile  were 
$14,715,  $14,654,  $15,006  and  $16,770, 
while  the  passengers  returned  in  fares 
$4451,  $4692,  $4720  and  $4965. 

Looked  at  from  another  angle,  the  per- 
centage of  increase  in  revenue  made  by 
each  mile  of  track  in  the  year  1913  over 
1910,  1911  and  1912,  respectively,  was 
13.7  per  cent.,  12.4  per  cent,  and  10.2 
per  cent. 

Where  the  Money  Went 

2.  There  are  three  items  which  make 
up  between  90  and  95  per  cent,  of  the 
expenses  of  operating  a  railroad.  In  the 
order  of  their  magnitude  they  are :  Trans- 
portation, maintenance  of  equipment — 
which  means  its  rolling  stock — and  the 
maintenance  of  the  roadbed,  bridges,  etc. 

These  49  railways  spent  $410,734,001 
for  transportation  charges  in  1910.  Their 
maintenance  of  equipment  consumed 
$195,727,105,  while  to  maintain  their 
railway  tracks,  bridges,  etc.,  demanded  an 
expenditure  of  $145,273,335.    As  the  total 

10 


expenses — money  paid  back  to  the  public 
— for  the  running  of  these  railroads  in 
1910  was  $800,662,522,  it  will  be  seen 
that  the  three  items  mentioned  accounted 
for  more  than  $750,000,000,  or  above 
15/16  of  the  money  paid  out. 

The  sums  of  money  which  these  49  rail- 
way systems  were  called  upon  to  pay  dur- 
ing the  years  1911,  1912  and  1913  had 
increased  steadily  from  year  to  year  until 
in  1913  the  increase  oyer  the  year  1910 
amounted  to  $92,000,000  in  transportation 
charges,  $51,000,000  in  equipment  main- 
tenance charges  and  $35,000,000  in  main- 
tenance of  way  and  structure  charges. 

3.  These  railroads  paid  out  in  taxes  for 
the  successive  years,  1910,  1911,  1912  and 
1913,  $43,140,475;  $45,898,383,  $51,055,- 
738  and  $53,946,004.  The  percentage  of 
increase  in  taxes  in  1913  over  1910,  for 
each  mile  of  line,  was  23.6  per  cent. 
When  the  total  amount  of  taxes  had  been 
slightly  more  than  forty-three  million  dol- 
lars in  1910 — in  the  space  of  three  years 
the  tax  expense  had  been  increased  almost 
eleven  millions  of  dollars,  or,  to  be  accu- 
rate,  $10,805,529. 


THE  RESULT 

The  operating  income  for  these  49  rail- 
way systems  in  1910  was  $362,006,165. 
This  income  fell  to  $321,927,779  in  1911, 
picked  up  to  $327,453,816  in  1912  and  to 
$3+7,803,564  in  1913.  Thus  the  actual 
loss  in  income  in  three  years  was  about 
$14,000,000,  and  this  in  the  face  of  an 
increase  of  annual  receipts  of  more  than 
$180,000,000,  and  the  addition  to  the  rail- 

41 


roads  property  investment  of  more  than 

half  a  billion  dollars  in  new  money. 

Each  mile  of  the  59,157  miles  of  railway 

line  operated  in  1913  showed  a  decrease  of 

5  per  cent,  in  net  operating  income  over 

each  mile  of  the  58,471  miles  in  use  in 

1910. 

*     *     *     * 

To  recapitulate  :  The  money  received 
by  the  railroads  for  the  business  they 
handled  on  each  mile  of  line  was  greater 
in  1913  than  in  1910  by  $2819,  or  13.7  per 
cent.,  yet  the  increase  in  expenses  more 
than  balanced  this  increase  and  resulted  in 
a  decrease  in  operating  income  of  $312  a 
mile,  or  5  per  cent. 

The  money  received  in  1913  was  greater 
by  $181,000,000  than  in  1910,  but  the 
expenses  and  taxes  had  increased  $195,- 
200,000.  Thus  the  net  operating  income 
of  these  49  railway  systems  was,  in  1913, 
less  by  over  $16,000,000  than  it  was  in 
1910,  notwithstanding  the  expenditure  of 
more  than  $650,000,000  for  improve- 
ments. 


42 


Filed  with  Interstate  Commerce 
Commission 

Compilation  in  matter  of  application  of  Eastern 
railways  for  increase  in  freight  rates,  1913. 

Operating  Revenues,  Expenses  and  Income,  in  the 

Aggregate  and  Per  Mile  of  Line  ;    Railways 

in  the   Eastern  District,   Fiscal 

Years  1910  and  1913 


Amount 

Increase  Per 

Account 

Aggregate  Amount 

Per  Mile 

Mile,    1913 

of  Line 

over  1910 

Total  Operating 

1910 

1913 

1910 

1913 

Amt. 

Pet. 

Revenues  .  . 

$1,205,155,435 

$1,386,073,429 

$20611 

$23430 

$2819 

13.7 

Freight    .... 

860,403,390 

992,078,364 

14715 

16770 

2055 

14.0 

Passenger  .  .  . 

260,234,927 

293,721,286 

4451 

4965 

514 

11.6 

Other  trans- 

portation  .  . 

73,114,526 

83,942,059 

1250 

1419 

169 

13.5 

Non-transpor- 

tation .... 

11,402,592 

16,331,720 

195 

276 

81 

41.6 

Total  Operating 

Expenses  .   . 

800,662,522 

984,314,319 

13693 

16639 

2946 

21.5 

Maint.  of  way 

and  struct.    . 

145,273,335 

180,535,226 

2484 

3052 

568 

22.8 

Maint.  of 

Equipment  . 

195,727,105 

246,690,465 

3347 

4170 

823 

24.6 

22,676,752 

24,116,559 

388 

408 

20 

5.1 

Transportation 

410,734,001 

502,086,884 

7025 

8487 

1462 

20.8 

General  .... 

26,251,329 

30,885,185 

449 

522 

73 

16.3 

Net  Operating 

Revenue   .  . 

404,492,913 

401,759,110 

6918 

6791 

dl27 

dl.8 

Outside  Oper. — 

Net  Revenue 

653,727 

def  9,542 

11 

def* 

dll 

Taxes     .... 

43,140,475 

53,946,004 

738 

912 

174 

23.6 

Operating 

Income  .  .  . 

362,006,165 

347,803,564 

6191 

5879 

d312 

d5.0 

Average 

Mileage     1910 

58 

,471 

Repre- 

sented       1913 

59 

,157 

*  Less  than  one  dollar.  def  Deficit.  d  Decrease. 
Explanatory  Note 
This  table  is  cumulated  from  monthly  returns  of  revenues  and  expenses  made 
by  the  railways  to  the  Interstate  Commerce  Commission.  There  are  included 
the  returnsof  the  forty-nine  railway  systems  covered  by  the  compilations  of  the 
Bureau  of  Railway  Economics,  with  the  exception  of  certain  small  roads  that 
have  annual  operating  revenues  of  less  than  $100,000,  and  are  therefore  ex- 
cused by  the  Commission  from  the  requirement  of  filing  monthly  returns. 


Authorities  i 
Monthly  returns  of  the  railways  to 
the  Interstate  Commerce  Commission 


Prepared  by 

Bureau  of  Railway  Economics 

Washington,  D.  C. 


43 


LtTIN    NO.    £> 


The  Case  for  Increased  Railroad  Rates 


The  Net  Condition  of  Eastern 
Railroads 

December  6,  1913. 

In  order  to  bring  to  the  attention  of  the 
Interstate  Commerce  Commission  and  the 
public  generally  the  facts  as  to  their  real 
condition,  the  35  railroad  systems  East  of 
the  Mississippi  and  North  of  the  Ohio 
have  filed  with  the  Commission  an  exhibit 
such  as  had  not  hitherto  been  compiled. 

It  eliminates  all  intercorporate  system 
ownership  of  capital  obligations  as  well  as 
receipts  and  payments  as  between  mem- 
bers of  a  railway  s}rstem,  and  reduces  re- 
sults to  a  net  figure  showing  the  actual 
conditions  as  they  affect  investor's  and  the 
public,  which  must  have  railway  facilities 
provided  for  its  use. 

These  railroads  own  53,670  miles  of 
roadway,  with  a  total  of  107,933  miles  of 
track.  Their  gross  earnings  from  1910  to 
1913  increased  $187,000,000,  while  oper- 
ating expenses  and  taxes  increased  $201,- 
000,000.  Tax  pavments  alone  increased 
from  $42,900,000  *in  1910  to  $54,490,000 
in  1913.  The  net  operating  income  ac- 
tually decreased  $16,311,000.  Conse- 
quently, even  had  these  companies  made 
no  increase  in  capital  expenditures  in  the 
period,  they  would  still  have  been  worse 
off  in  1910  bv  this  amount  of  over  $16,- 
000,000. 

But  in  the  three  years,  the  actual  prop- 
erty investment — that  is,  the  cost  of  rail- 
road and  equipment — increased  bv  almost 
$660,000,000.  With  increased  business  to 
the  extent  of  $187,000,000,  there  was  a 
decline  in  net  operating  income  of  $16,- 
311,000,  notwithstanding  this  large  in- 
crease of  almost  $660,000,000  in  the  in- 
vestment in  the  property. 

It  required  above  $3.50  property  invest- 
ment for  each  dollar  of  increased  gross 
earnings;  and  for  each  $1.87  of  increased 
gross    earnings,    increased    expenses    and 

44 


taxes  were  $2.01,  without  any  allowance 
for  interest  on  tlie  new  money  spent  to 
supply  facilities  to  earn  the  increased 
gross  revenue. 

In  1910  these  companies  showed  net 
operating  income  equal  to  6.28  per  cent. 
on  their  property  investment,  but  in  1913 
this  percentage  had  fallen  to  5.36  per 
<rin. 

The  total  capital  obligation  of  these  35 
companies  are  $6,389,000,000,  of  which 
funded  debt  is  $3,829,000,000,  and  the 
balance  capital  stock. 

These  companies  earned  in  1913,  in 
gross,  $1,424,000,000.  Their  net  operat- 
ing income  after  deducting  expenses, 
taxes,  rents,  and  hire  of  equipment  was 
$336,754,000.  Their  net  corporate  in- 
fome  after  payment  of  interest  on  funded 
debt  and  other  obligatory  charges  in  1913 
was  $206,600,000.  Out  of  this  net  in- 
come the  companies  declared  dividends  of 
5.10  per  cent,  on  the  capital  stock  out- 
standing, amounting  to  $130,000,000. 
This  sum  was  $19,000,000  less  than  the 
dividends  paid  in  1912,  and  $7,000,000 
less  than  the  dividends  in  1910. 

The  design  of  the  exhibit  containing 
these  figures  was  to  emphasize  statistically 
that  the  reason  for  the  application  is  that 
in  the  last  three  years  (since  the  last  ap- 
plication was  made  to  the  Commission  for 
an  advance  in  freight  rates),  the  operating 
expenses  of  these  railroads  have  increased 
faster  than  their  gross  earnings,  with  the 
result  that  net  operating  income  has  not 
increased  sufficiently  to  furnish  any  addi- 
tional return  on  the  additional  invest- 
ment of  the  past  three  years. 


15 


The  Case  for  Increased  Railroad  Rates 


The  Railroad  Situation  in  the 
Middle  West 

December  7,  1913. 

As  part  of  the  presentation  by  the  rail- 
roads of  the  need  for  an  increase  in  freight 
rates,  the  railroads  of  the  Middle  West, 
operating  in  what  is  known  as  Central 
Freight  Association  territory,  have  filed 
with  the  Interstate  Commerce  Commis- 
sion elaborate  statistical  data  covering  the 
condition  of  those  companies. 

Figures  covering  78.6  per  cent,  of  the 
entire  mileage  in  the  territory  show  that 
these  companies  enjoyed  in  1913  an  in- 
crease in  operating  revenues  of  $76,000,- 
000  over  1910;  nevertheless,  after  paying 
operating  expenses  and  taxes,  they  suf- 
fered a  loss  of  $12,000,000  in  operating 
income. 

This  result  was  due  to  an  increase  in  the 
ratio  of  operating  expenses  and  taxes  to 
gross  as  between  1910  and  1913  from  72 
per  cent,  to  78.2  per  cent.  This  showing 
was  made  despite  the  fact  that  large  sums 
of  new  capital  were  invested  in  the  prop- 
erty. 

Besides  the  loss  in  net  revenues  for  the 
year  ended  June  30,  1913,  as  compared 
with  1910,  the  figures  for  these  same  roads 
for  the  three  months  of  July,  August  and 
September,  1913,  show  a  decrease  in  net 
operating  earnings  of  $6,937,353,  or  ap- 
proximately 20  per  cent. 

In  addition  to  the  tables  covering  figures 
for  all  the  roads  in  this  territory,  special 
attention  has  been  directed  to  the  condi- 
tion of  a  special  group  of  roads  which,  as 
stated  by  Mr.  F.  A.  Delano  in  his  opening 

46 


statement  the  previous  day,  were  more 
particularly  representative  of  the  "whole 
situation"  in  Central  Freight  Association 
territory. 

This  group  embraces  28  roads,  with 
23,167  miles  of  road,  or  51.5  per  cent,  of 
the  entire  mileage  in  the  territory,  and 
including  such  important  lines  as  the  Big 
Four  System,  Vandalia,  Chicago  and  East- 
ern Illinois,  Grand  Trunk  Western,  Grand 
Rapids,  Illinois  Central,  Chicago  and  Al- 
ton, Nickel  Plate,  and  Wabash  Railroads. 

In  1913  roads  in  this  group  earned  $63,- 
000,000,  more  than  in  1908,  which  is 
known  as  the  panic  year,  and  operating 
expenses  and  taxes  were  $62,000,000 
more.  Net  operating  revenues,  after  pay- 
ing expenses  and  taxes,  were  only  $811,- 
000  more  than  in  1908. 

The  net  corporate  income  of  these  prop- 
erties was  actually  $8,000,000  less  than  in 
1908,  although  during  this  five-year  period 
$180,000,000  new  capital  was  put  into 
these  properties. 

In  1913  the  roads  in  this  group  earned 
$36,000,000  more  than  in  1910 ;  operating 
expenses  and  taxes  were  $45,000,000  more 
than  in  1910,  and  the  net,  after  operating 
expenses  and  taxes,  decreased  $9,500,000. 
The  net  corporate  income  decreased  al- 
most $17,000,000. 

If  in  1913  the  railroads  in  this  group 
had  been  able  to  operate  at  the  same  ratio 
as  in  1910,  their  net  operating  revenue 
after  paying  taxes,  would  have  been  al- 
most $18,000,000  greater  than  it  was  in 
1913. 

The  increase  in  cost  is  largely  in  two 
47 


items,  transportation  and  maintenance  of 
equipment. 

Mr.  F.  A.  Delano,  one  of  the  receivers 
of  the  Wabash  Eailroad,  in  presenting  the 
situation  of  the  Middle  Western  railroads 
to  the  Interstate  Commerce  Commission, 
says: 

"It  will  be  obvious  that  a  5  per  cent, 
increase  in  rates  will  not  be  adequate 
to  meet  the  demands  of  the  territory. 
The  rates  in  that  territory,  both 
freight  and  passenger,  are  the  lowest 
rates  prevailing  in  the  United  States, 
and  the  interests  of  the  people  of  that 
rapidly  growing  and  developing  sec- 
tion of  the  country,  to  say  nothing  of 
the  railroad  companies,  require,  in  the 
near  future,  a  readjustment  of  the 
rates,  both  freight  and  passenger,  to 
a  basis  which  will  enable  that  terri- 
tory to  have  good  railroads  and  the 
people  to  have  efficient  and  adequate 
service,  and  to  progress  measurably 
with  the  other  sections  of  the  coun- 
try." 


48 


fcSU  LL  t  I  i  r>s    NO 


The  Case  for  Increased  Railroad   Rates 


How  the  Railroads  Have 

Obtained  Their 

Economies 

December  8,  19131 

The  railroads  of  the  Eastern  District 
participating  in  the  application  for  a  5 
per  cent,  increase  in  freight  rates  have 
filed  with  the  Interstate  Commerce  Com- 
mission a  series  of  statistical  tables  which 
give  the  details  as  to  various  operating 
conditions  in  the  last  decade  incidental  to 
handling  and  carrying  freight. 

The  principal  result  herein  enumerated 
is  set  forth  in  the  fact  that  for  1912  these 
railroads  were  able  to  carry  in  each  freight 
train  an  average  load  of  510  tons,  while 
the  average  in  1903  had  been  but  391  tons. 

This  achievement  was  one  of  the  results 
of  the  fact  that  the  49  railroads  in  the  terri- 
tory affected  expended  during  the  past  ten 
years  an  average  of  $200,000,000  a  year  in 
enlarging  the  roadbed  and  equip- 
ment. The  increase  in  the  property  in- 
vestment account  per  mile  is  due  to  many 
things — larger  and  more  expensive  ter- 
minals and  stations  for  both  passenger  and 
freight;  elimination  of  curves,  grades  and 
crossings;  heavier  and  improved  bridges, 
rails,  ties,  signals,  interlocking,  etc.,  and 
generally  a  more  substantial  standard  of 
roadbed  to  carry  the  heavier  equipment. 

The  railroads  also  have  built  larger 
locomotives.  The  average  locomotive  in 
service  in  1912  had  grown  so  in  size  and 
power  that  it  could  haul  a  heavier  load  by 
more  than  one-third — 33.8  per  cent.,  to  be 
strictly  accurate — than  the  locomotive  of 
1903.     This  meant  that  two  locomotives 

49 


in  1912  could  almost  do  the  work  of  three 
average  locomotives  a  decade  earlier.  This 
is  expressed  technically  in  the  statistical 
fact  that  tractive  power  of  locomotives  on 
these  roads  increased  from  22,796  pounds 
in  1903  to  30,501  pounds  in  1912. 

As  the  engines  increased  in  size,  so  did 
the  freight  cars.  The  average  freight  car 
in  use  in  1903  could  carry  a  little  less  than 
31  tons. 

In  ten  years  the  capacity  of  freight  cars 
increased  to  39^  tons — a  gain  of  more 
than  9y2  tons.  At  present  three  freight 
cars  can  carry  almost  as  much  as  four 
could  have  carried  in  1903. 

Every  freight  car  with  any  load  in  it 
carried  19  tons  of  freight  on  an  average  in 
1903.  This  had  increased  to  almost  23  tons 
in  1912,  or  short  of  20  per  cent.  That  is, 
five  loaded  cars  in  1912  were  doing  the 
business  of  six  loaded  cars  in  1903. 
*     *     *     * 

The  average  number  of  cars  in  each 
freight  train — loaded  cars,  empty  cars  and 
cabooses — increased  in  this  period  from  a 
train  of  30.3  cars  to  one  of  34  cars.  While 
the  number  of  loaded  cars  in  each  freight 
train  was  20.7  in  1903,  it  was  22.4  in 
1912. 

The  result  was  that  these  railroads  in 
1912  carried  15  tons  of  freight  on  an  aver- 
age on  every  freight  car  hauled — loaded  or 
empty — when  they  had  only  carried  13 
tons  in  1903  an  increase  of  two  tons  on 
each  freight  car  moved  in  the  decade. 


50 


The  Case  for  Increased  Railroad  Rates 


How  Average  Rates  Have  De- 
clined and  Wages  Gone  Up 

December  9,  1913. 

The  decrease  which  has  taken  place  in 
the  money  received  by  the  railroads  for 
carrying  each  passenger  a  mile,  as  well  as 
the  decrease  for  carrying  each  ton  of 
freight  a  mile  in  the  decade  of  1903-1912, 
is  set  forth  in  two  statistical  exhibits, 
which  have  been  filed  with  the  Interstate 
Commerce  Commission  by  the  49  railways 
participating  in  the  application  for  a  rate 
increase  of  5  per  cent. 

These  railroads  in  1903  received  .653  of 
a  cent,  on  the  average,  for  each  ton  of 
freight  carried  one  mile.  If  it  were  pos- 
sible to  conceive  the  hauling  by  rail 
around  the  world  of  this  average  ton  of 
freight,  the  average  railroad  company's 
bill,  at  this  average  rate  for  doing  it, 
would  have  been  $163.25. 

Average  freight  revenues  had  dropped 
in  1912  to  .617  of  a  cent  a  mile  ($0.00617). 
This  means  that  the  ton  of  freight  would 
be  hauled  around  the  world  for  $154.25, 
or  a  decrease  of  $9  a  ton  in  the  decade  for 
such  a  distance.  This  represents  a  loss 
of  5.8  per  cent,  in  money  received  for 
carrying  the  same  weight  of  freight.  Even 
admitting  that  the  decline  in  freight  rev- 
enue per  ton  mile  may  be  partly  due  to  a 
change  in  the  character  of  the  traffic  han- 
dled, the  loss  in  revenue  remains  an  ac- 
tual fact. 

Nearly  three  times  as  much  money  was 
received  on  the  average  for  carrying  a  pas- 
senger a  mile  in  1903  as  for  carrying  a 
ton  of  freight  the  same  distance.  These 
roads  that  year  received  1.847  cents  for 
carrying  each  passenger  a  mile.  In  dol- 
lar sign  figures  this  reads  $0.01847. 

In  the  impossible  case  of  giving  a  pas- 
senger a  continuous  ride  around  the  world 
at  the  equator,  he  would  have  paid  the  rail- 

51 


roads  for  the  trip,  based  on  the  average 
$461.75  in  1903.  He  could  have  had  the 
ride  around  the  world,  at  the  1912  average 
rate,  for  $451.50 — a  saving  to  him  of 
$10.25,  and  an  equal  loss  in  money  re- 
ceived by  the  railroads  for  doing  the  same 
business. 

His  average  rate  for  each  mile  in  1912 
would  have  been  1.806  cents,  as  compared 
with  $0.01847  in  1903. 

*     *     *     * 

WAGES 

While  these  reductions  were  in  prog- 
ress aggregate  wages  and  average  rate  of 
wages  paid  per  man  were  steadily  rising. 

The  aggregate  amount  of  wages  paid  by 
the  railways  of  the  Eastern  District  to  its 
employes  in  the  year  1903  was  364  million 
dollars  (excluding  general  officers).  The 
amount  paid  in  1912  was  567  millions — 
an  increase  of  203  millions  of  dollars,  or 

56  per  cent.     Employes  received  in  wages 

57  million  dollars  more  in  1912  than  they 
did  in  1910,  or  11  per  cent. 

*  The  advanced  wage  movement  which 
culminated  in  1910  added  $34,000,000  a 
year  (based  on  the  payrolls  of  that  year) 
to  the  payrolls  of  the  railroads  in  the  East- 
ern District. 

The  award  just  announced  by  the  arbi- 
trators will  give  the  conductors  and  train 
men  alone  of  the  roads  affected  in  the 
Eastern  District  $6,000,000  increase 
wages  annually.  And  the  effect  of  the  full 
crew  laws  has  added  $4,000,000  a  year. 

*  Cf.  Statement  of  Mr.  Daniel  Willard,  Bulletin  No.  I. 


52 


The  Case  for  Increased  Railroad  Rates 


Testimony  As  To  Conditions 
On  Erie  Railroad  System 

December  10,  1913. 

The  Erie  Railroad  System,  through  Mr. 
Charles  P.  Crawford,  to-day  presented  to 
the  Interstate  Commerce  Commission  a 
statistical  statement  of  its  own  condition, 
in  relation  to  the  application  of  the  rail- 
roads for  an  advance  in  freight  rates. 

The  following  is  a  summary  of  Mr. 
Crawford's  testimony : 

"In  1913  the  property  investment  of 
Erie  Railroad  System  had  increased  $88,- 
459,748  since  1903,  or  24.26  per  cent., 
while  its  net  operating  revenue  increased 
only  $1,701,404,  or  9.36  per  cent.,  and  its 
net  operating  income  decreased  $799,205, 
or  4.76  per  cent. 

"During  the  same  period  its  gross  oper- 
ating revenue  increased  $19,133,219,  or 
39.70  per  cent.,  showing  greatly  increased 
service  to  the  public.  The  Erie  System  in 
1913  fell  $799,205  short  of  receiving  any 
additional  return  on  its  great  increase  in 
investment,  although  it  rendered  a  greatly 
increased  amount  of  transportation  serv- 
ice to  the  public. 

"The  business  handled  by  the  System 
has  greatly  increased  since  1903.  The 
number  of  tons  of  revenue  freight  car- 
ried one  mile  has  increased  from  5600 
millions  in  1903  to  6669  millions  in  1910, 
7976  millions  in  1913. 

"During  this  period  the  average  rev- 
enue per  ton  per  mile  was  6.13  mills  in 
1903,   6.15   in    1910,   and   5.92   in    1913. 

53 


The  revenue  per  ton  per  mile  has  de- 
creased 3.74  per  cent,  since  1910. 

"While  the  decrease  in  the  average  rev- 
enue per  ton  per  mile  since  1903  may  have 
resulted  in  part  from  changes  in  the  char- 
acter of  traffic  handled  and  in  its  average 
movement,  yet  it  is  believed  the  reduction 
in  the  average  revenue  per  ton  per  mile 
has  resulted  in  large  part  from  rate  reduc- 
tions. 

"Notwithstanding  these  reductions  in 
the  average  revenue  per  ton  per  mile,  the 
total  operating  revenue  has  increased 
from  $48,000,000  in  1903  to  $59,000,000 
in  1910,  and  $67,000,000  in  1913,  making 
an  increase  of  39.70  per  cent,  for  1913  as 
compared  with  1903,  and  of  13.96  per 
cent,  as  compared  with  1910. 

"Under  normal  conditions,  with  such  a 
large  increase  in  the  business  handled  and 
in  operating  revenue,  there  should  be  a 
substantial  decrease  in  the  ratio  of  oper- 
ating expenses  to  operating  revenues;  but 
this  has  not  been  the  case,  as  operating 
expenses  and  taxes  have  increased  at  a 
rate  largely  in  excess  of  the  increase  in 
operating  revenues/' 


54 


bSU  LLtTI  IN      INO.     IU 


The  Case  for  Increased  Railroad  Rates 


Changes  In   Economic  Con- 
ditions Affecting  Railway 
Earnings 

December  10,  1913. 

Mr.  Charles  A.  Conant,  economist  and 
author  of  "The  Principles  of  Money  and 
Ranking,"  was  called  by  the  railroads  to 
testify  before  the  Interstate  Commerce 
Commission  regarding  changes  in  the 
purchasing  power  of  money,  and  the 
world-wide  demand  for  capital. 

Mr.  Conant  said,  in  substance: 

"'The  purchasing  power  of  the  dol- 
lar over  the  great  mass  of  commodities 
has  permanently  fallen  since  the  present 
schedule  of  passenger  and  freight  rates 
was  established. 

"Average  prices  in  1912  were  48.9  per 
cent,  higher  than  in  1897;  47.8  per  cent, 
higher  than  in  1896 ;  and  18.2  per  cent, 
higher  than  in  1904.  Analysis  of  the  de- 
tails of  prices  by  classes  of  products  shows 
that  under  the  head  of  metals  and  imple- 
ments, the  index  number  advanced  from 
86.6  per  cent,  in  1897  to  126.1  per  cent, 
in  1912;  lumber  and  building  materials, 
from  90.4  per  cent,  in  1897  to  148.2  per 
cent,  in  1912,  or  an  increase  of  more  than 
60  per  cent. 

"In  1880,  the  first  year  after  the  re- 
sumption of  specie  payments,  prices  were 
much  higher  than  the  average  of  1890- 
1899.  An  almost  uninterrupted  decline 
occurred,  however,  until  1896,  when  the 
index  number  fell  to  90.4,  or  more  than 
JO  per  cent,  below  the  prices  of  1880. 
With  the  resumption  of  business  activity 

55 


iii  1898,  the  index  number  begins  -to  rise 
until  it  has  attained  110.5  in  1900. 

"There  was  then  a  slight  recession,  fol- 
lowed by  a  slow  recovery,  which  carried 
the  index  number  for  1904  to  113.  Then 
began  the  rapid  upward  movement  of  the 
past  eight  years — interrupted  by  the  de- 
pression of  1908 — which  finally  advanced 
the  index  number  for  the  year  1912  to 
133.6.  This  is  an  increase  of  nearly  eleven 
points  over  the  low  point  of  1908,  and  of 
40.2  points  over  the  index  number  of 
1898. 

"One  of  the  most  remarkable  evidences 
that  the  increase  in  the  value  of  goods  in 
terms  of  money  in  recent  years  has  been 
broad  and  general  in  character  is  afforded 
by  the  statistics  which  are  compiled  an- 
nually by '  the  Comptroller  of  the  Cur- 
rency in  regard  to  the  banking  power  of 
the  United  States." 

After  noting  that  the  banking  power  of 
the  country  increased  111  per  cent,  in 
twelve  years,  Mr.  Conant  continued: 

"The  essential  question  is  whether  this 
great  increase  in  banking  power,  by  111 
per  cent,  in  twelve  years,  reflects  a  corre- 
sponding increase  in  the  annual  produc- 
tion or  in  the  accumulated  wealth  of  the 
country.  The  population  during  this  pe- 
riod increased  only  25.3  per  cent.,  so  that 
the  increase  in  banking  power  was  more 
than  four  times  as  rapid  as  that  in  popu- 
lation. For  the  four  years  between  1908 
and  1912  the  increase  in  banking  power 
was  27.8  per  cent.,  while  the  increase  in 
population  was  only  9.3  per  cent." 

In  dealing  with  the  effect  upon  railroad 

56 


freight  earnings  of  the  purchasing  power 
of  money,  Mr.  Conant  said: 

"Taking  the  receipts  for  freight  alone 
per  ton-mile  and  expressing  them  in 
mills,  or  tenths  of  a  cent,  it  appears  that 
this  average  of  ton-mile  receipts  varied 
only  within  narrow  limits  during  the 
whole  of  the  sixteen  years  from  1896  to 
1912.  In  1896,  the  average  receipts  per 
ton-mile  were  8.06  mills;  in  1912,  they 
were  7.43  mills.  This  represented  a  de- 
cline of  63  hundredths  of  a  mill,  or  about 
7  per  cent. 

"If  the  receipts  per  ton-mile  in  1896 
were  8.06  mills,  and  wholesale  prices  bore 
a  ratio  to  the  standard  of  90.4  points,  the 
purchasing  power  of  the  receipts  per  ton- 
mile  was  8.92  mills.  As  the  index  num- 
ber of  prices  advanced,  however,  even  if 
receipts  remained  the  same  in  terms  of 
money,  the  purchasing  power  of  the  re- 
ceipts inevitably  fell  in  a  striking  ratio. 

"After  the  revival  of  business  activity  in 
1897,  receipts  per  ton-mile  declined  only 
slightly,  but  the  index  number  of  whole- 
sale prices  increased  rapidly.  The  result 
was  that  the  purchasing  power  of  the 
money  received  for  freight  fell  from  a 
ratio  of  8.06  in  1898  down  to  6.61  in 
1905. 

"Then  began  another  decline,  inter- 
rupted only  by  the  depression  of  1908, 
which  finally  carried  the  ratio  of  purchas- 
ing power  of  freight  receipts  in  1912 
down  to  5.56.  When  this  purchasing 
power  of  the  receipts  per  ton-mile  is  com- 
pared with  the  corresponding  figure  of 
1896,  we  find  a  decline  of  3.36  mills,  or 
37.6  per  cent. 

57 


"I  conclude,  therefore,  simply  as  a  ques- 
tion of  mathematics,  and  without  under- 
taking to  enter  into  the  intricacies  of 
railway  accounting  or  the  special  .demands 
which  have  been  made  upon  the  railways, 
that  the  purchasing  power  of  the  moneys 
which  are  now  paid  for  freight  is  approxi- 
mately 37  per  cent,  less  in  the  market  for 
commodities  than  it  was  in  1896." 

•     *     *     * 
The  Demand  for  Capital 

On  the  subject  of  the  world-wide  de- 
mand for  capital,  Mr.  Conant  said : 

"In  recent  }rears  new  demands  have 
converged  upon  the  supply  of  available 
capital  in  an  unusual  degree  from  the  con- 
version of  industrial  enterprises  into  stock 
companies,  the  absorption  and  merger  of 
old  companies  with  new,  the  great  exten- 
sion of  the  system  of  local  traction  lines, 
the  demands  of  undeveloped  countries  for 
railways  and  industrial  equipment,  and 
the  remarkable  expansion  in  the  calls  of 
governments  upon  the  financial  markets 
for  the  means  of  increasing  armaments 
and  making  public  improvements. 

"This  great  demand  for  capital  which 
converges  on  the  principal  money  markets 
of  the  world  has  effects  similar  to  those 
produced  by  great  demand  upon  other 
commodities — it  raises  its  price.  As  the 
price  of  capital  is  the  rental  charged  for 
its  use,  or  the  interest  rate,  this  rate  has 
risen  in  a  marked  degree  in  recent  years. 
The  influence  of  this  condition  may  be 
summarized  as  follows: 

"1.  New  securities  can  only  be  sold  at  lower 
prices  than  formerly  or  must  pay  higher  in- 
terest rates  on  their  par  value. 

58 


"2.  The  prices  of  outstanding  securities  fall, 
making  them  unsalable  in  the  hands  of  their 
holders  except  at  a  loss  and  reducing  the  as- 
sets and  the  surplus  funds  of  savings  banks, 
other  banking  institutions,  and  insurance  com- 
panies. 

"3.  The  seekers  of  new  capital  by  means  of 
security  issues  must  pay  a  larger  amount  in 
money  for  its  use,  and  in  view  of  the  rise  in 
general  prices,  must  pay  more  for  their  ma- 
terials, thus  making  necessary  a  higher  rate  of 
earnings  than  formerly  in  order  to  meet  fixed 
charges. 

"4.  Under  the  conditions  of  competition  for 
capital  thus  established,  industries  of  high 
earning  power  are  able  to  outbid  those  of 
lower  earning  power  for  the  supply  of  free 
capital  in  the  market. 

"5.  Incident  to  the  decline  in  the  purchasing 
power  of  money,  there  is  a  tendency  on  the 
part  of  investors  to  shift  their  investments  to 
those  paying  higher  returns  than  formerly,  in 
order  to  meet  the  increased  cost  of  living,  even 
at  the  risk  of  some  slight  decrease  in  security. 

"6.  In  so  far  as  the  decline  in  the  purchasing 
power  of  money  is  recognized  in  the  financial 
world  as  a  factor  likely  to  be  continuously  felt, 
there  will  be  a  tendency  on  the  part  of  in- 
vestors to  refrain  from  purchasing  securities 
for  long  terms,  paying  a  fixed  income  in 
money. 

"The  railways  have  not  adopted  their 
charges,  as  have  other  industries,  to  the 
change  in  the  purchasing  power  of  money. 
They  have  continued  to  sell  their  services 
for  an  amount  which  has  remained  com- 
parative^ fixed  in  money,  but  has  de- 
clined greatly  in  purchasing  power. 

"Such  additional  capital  as  they  have 
sought  by  the  issue  and  sale  of  securities 
has  been  obtained  on  higher  terms  than  in 
former  years,  while  its  purchasing  power, 
in  materials  and  wages,  has  been  much 
less  than  in  former  years.  The  railways 
have  been  in  the  peculiar  position  of  see- 
ing prices  rising  all  around  them,  while 
they  have  been  unable  to  make  advances 

59 


proportionate  to  their  changed  relations 
to  other  industries. 

"If  the  value  of  the  money  received  by 
the  railways  for  their  services  has  so  se- 
riously declined  in  purchasing  power  as  to 
deprive  them  of  the  means  of  meeting 
their  legitimate  charges  and  obtaining 
new  capital  at  its  present  rental  price, 
they  are  not  on  an  equality  with  other  in- 
dustries, they  are  receiving  a  much  less 
proportionate  share  of  the  proceeds  of  the 
economic  output  of  the  country  than  that 
which  they  formerly  received,  and  they 
are  less  capable  of  contributing  their 
share  to  equipping  this  country  for  un- 
fettered competition  with  other  countries 
in  the  field  of  production  and  interna- 
tional commerce." 


60 


The  Case  for  Increased  Railroad  Rates 


Increases  in  Freight  Rates 
World-Wide 

December  14,  1913 

At  the  hearing  before  the  Inter- 
state Commerce  Commission  on 
December  10,  Mr.  Charles  A. 
Conant,  testifying  in  reference  to 
the  proposed  increase  in  freight 
rates,  stated  that  adjustments  of 
rates  had  been  made  in  many 
leading  countries  on  account  of 
the  increased  cost  of  operation. 

Mr.  Conant  cited,  as  authorita- 
tive on  this  point,  an  article  by 
Mr.  C.  Colson,  the  eminent 
French  economist,  published  in 
the  "Revue  Politique  et  Parle- 
mentaire"  for  August  10,  1913. 

Mr.  Colson  is  a  Conseiller 
d'Etat,  was  formerly  Director  of 
Railways  in  the  French  University 
of  Public  Works,  and  is  Professor 
of  Political  Economy  in  the  Ecole 
Nationale  des  Ponts  et  Chaussees 
of  Paris,  etc. 

A  copy  ,of  a  translation  (made 
by  Mr.  J.  H.  Parmelee,  Statistician 
of  the  Bureau  of  Railway  Econom- 
ics) of  that  article  has  been  filed 
by  the  railroads  as  an  exhibit  in  their 
case,  and  is  reprinted  herewith. 

61 


AMONG    the     economic     phenomena 

L\  which  have  characterized  the  last 
J.  JL  few  years  few  have  been  more 
marked  than  the  general  increase  in  prices. 
This  increase  at  first  influences  the  rail- 
way situation  only  by  the  increase  which 
it  brought  about  in  railway  expenses.  It 
is  now  commencing  to  bring  about  rate 
increases  on  a  fairly  large  number  of  rail- 
way systems.  In  view  of  the  rapid  and 
continuous  decline  in  transportation  rates, 
which  has  been  one  of  the  principal  fac- 
tors of  economic  progress  for  a  century, 
this  fact  certainly  merits  attention. 

When  price  variations  are  spoken  of  by 
the  public  at  large,  comment  nearly  al- 
ways centers  around  changes  brought 
about  through  retail  sales.  Economists 
who  endeavor  to  measure  these  variations 
with  exactness  generally  take  for  the  pur- 
pose the  average  prices  of  the  principal 
agricultural  or  industrial  products  as 
registered  upon  the  exchanges  where  they 
are  sold  in  bulk.  These  averages  they  call 
index  numbers.  In  most  cases  they  are 
interested  only  in  transactions  involving 
material  goods,  which  constitute,  however, 
perhaps  only  50  per  cent,  of  all  current 
transactions.  The  prices  taken  into  ac- 
count by  them  do  not  as  a  matter  of  fact 
cover  either  wages  or  rents  or  transporta- 
tion rates.  To  get  an  exact  idea  of  what 
a  given  sum  of  money  represents  at  dif- 
ferent periods,  it  would  be  necessary  to 
take  account  of  both  wholesale  and  retail 
prices  of  a  number  of  products,  such  as 
services  rendered  by  different  categories  of 
labor,  by  landlords  who  lease  their  prop- 
erty, by  transportation  agencies,  etc.  This 
would  be  a  considerable  task  and  one 
which  we  believe  has  never  been  attempted 
as  a  whole. 

Yet  studies  made  with  respect  to  each 
price  category  taken  by  itself,  according 
as  they  measure  the  general  movement, 
permit  at  least  an  appreciation  of  its  sig- 

62 


nificance  and  importance.  To  be  sure, 
this  movement  is  not  manifested  to  the 
same  degree  in  different  kinds  of  transac- 
tions, or  in  different  countries  whose  mar- 
kets are  separated  by  more  or  less  ob- 
structive customs  barriers.  A  generally 
characteristic  gain  is,  however,  main- 
tained. 

Oscillations  in 
Prices 

Disregarding  oscillations  resulting  from 
alternating  periods  of  prosperity  and  de- 
pression, there  was  till  recently  a  general 
and  rapid  decline  in  the  prices  of  indus- 
trial products,  resulting  from  technical 
progress.  Agricultural  products,  on  the 
other  hand,  increased  constantly  in  price 
in  Western  Europe  until  about  1875-1880, 
as  a  result  of  increasing  density  of  popu- 
lation within  a  limited  area.  But  about 
this  time  the  tremendous  decline  in  trans- 
portation rates  that  resulted  from  exten- 
sions of  railway  and  steamship  lines  per- 
mitted older  settled  regions  to  draw  a 
portion  of  their  necessary  subsistence  from 
scarcely  settled  territory  in  the  New 
World;  the  rapid  fall  in  agricultural 
prices  which  took  place  toward  the  end 
of  the  nineteenth  century  resulted  in  an 
agricultural  crisis.  Both  the  increase  of 
population  in  the  New  World  and  in  the 
Old,  and  the  increase  in  consumption  due 
to  increased  wages,  have  brought  about  a 
new  movement  of  rising  prices  during  the 
past  fifteen  years. 

If  one  seeks  to  measure  the  general 
movement  of  wholesale  prices  by  that  of 
the  customs  values  of  French  imports  and 
exports,  an  increase  of  about  20  per 
cent,  from  1847  (the  date  of  the  first 
valuation)  to  1860-1865  will  be  observed, 
followed  by  a  gradual  decrease  of  about 
40  per  cent,  from  the  latter  period  down 
to  1896-1897.    Then  the  movement  again 

63 


reversed  itself  and  the  increase  which  has 
resulted  is  actually  about  20  per  cent, 
over  the  prices  of  fifteen  years  ago.  It 
must  not  be  forgotten  that  the  present 
moment  probably  marks  the  culminating 
point  of  a  period  of  business  expansion 
which  will  undoubtedly  be  followed  by  a 
certain  temporary  reaction. 

Retail  prices  have  not  followed  exactly 
the  trend  we  have  just  described,  because 
the  gap  between  them  and  wholesale  prices 
naturally  goes  on  increasing  in  the  de- 
gree to  which  wages  and  business  rentals 
in  congested  centers  continue  to  rise.  Dis- 
regarding products  of  exceptional  quality, 
the  prices  of  which  increase  continuously 
with  the  increased  number  of  fairly  rich 
families  who  use  them,  the  following  vari- 
ations in  current  prices  may  be  noted : 

Furniture  and 
Food 

The  cost  of  furniture  and  of  clothing 
declined  constantly  until  about  1896-1897, 
but  has  risen  a  little  since  that  time. 
As  to  articles  of  food,  the  increase  was 
very  marked  up  to  1880,  while  the  period 
since  1880  is  divided  into  two  equal  parts, 
the  first  of  which  is  characterized  by  a 
notable  decrease,  and  the  second  by  an 
increase  which,  contrary  to  general  belief, 
has  not  yet  brought  prices  up  to  the  level 
reached  some  thirty  years  ago. 

Wages,  on  the  other  hand,  have  con- 
stantly increased.  The  increase,  rather 
slow  up  to  1850,  was  extremely  rapid,  both 
in  agriculture  and  in  industry,  between 
that  date  and  the  agricultural  crisis.  It 
slacked  considerably  in  the  country  dis- 
tricts, and  to  a  slight  extent  in  the  indus- 
trial centers,  thirty  years  ago.  During 
the  past  fifteen  years,  however,  it  has  re- 
sumed an  accelerated  progress,  first  in  the 
towns,  then  in  the  rural  districts.  One 
may  sum  up  the  change  in  living  condi- 

64 


tions  of  laborers  during  two  intervals, 
thirty  years  apart,  by  following  a  study 
of  the  French  Statistical  Office  prepared 
with  the  care  and  acumen  characteristic . 
of  all  the  labors  of  its  director,  M.  Lucien 
March.  The  results  of  this  study  are 
shown  by  the  following  relative  figures 
(calculated  by  assuming  the  correspond- 
ing figures  of  the  year  1900  as  equivalent 
to  100)  : 

1850     1880      1910 

Wages   51         82         110 

Cost  of  living  (uni- 
form throughout)     85.5    110         104 
Purchasing      power 

of  wages 59.5      74.5      106 

The  underlying  statistics  for  this  table 
were  drawn  especially  from  the  cities,  and 
notably  from  Paris;  but  the  results  may 
well  be  extended  to  cover  the  country,  at 
least  for  the  three  dates  considered.  It 
was  only  for  a  portion  of  the  years  be- 
tween 1880  and  1910  that  the  agricul- 
tural crisis  seems  to  have  stood  in  the 
way  of  actual  parallelism  of  movement 
in  city  and  country. 

Effect  of  Labor 
Organization 

It  should  be  remarked  in  passing  that 
the  advance  in  wages  produced  solely  by 
the  play  of  economic  forces,  notably  tech- 
nical progress  and  the  accumulation  of 
capital,  was  more  rapid  from  1850  to 
1880  than  from  1880  to  1910.  Statistics 
confirm  what  a  study  of  the  mechanism 
of  prices  teaches,  contrary  to  almost  uni- 
versal opinion,  that  the  organized  labor 
movement  (infinitely  more  powerful  in 
the  second  of  the  thirty-year  periods  con- 
sidered above)  is  powerless  to  accelerate 
the  advance  in  wages.  We  even  believe 
that  in  France  it  had  the  reverse  effect 
during  the  last  few  years,  by  disseminat- 
ing ideas  among  the  working  classes  that 

65 


have  considerably  reduced  the  labor  out- 
put. The  result  is  that  the  net  cost  to 
the  employer  of  a  given  piece  of  work  has 
increased  in  recent  years  to-  a  much 
greater  extent  than  is  indicated  by  statis- 
tics of  increases  in  hourly  or  daily  wages. 
This  net  cost  would  no  doubt  be  less,  the 
cost  of  living  would  also  be  less,  the  gain 
to  the  workman  would  be  considerably  in- 
creased, and  his  purchasing  power  would 
be  very  much  greater,  if  the  slackening 
of  endeavor  which  has  so  much  diminished 
the  productivity  of  his  work  were  less  ac- 
centuated. As  a  matter  of  fact,  in  view 
of  the  attitude  of  labor,  the  peculiar  men- 
tal influence  of  the  labor  unions  is  felt 
principally  with  regard  to  the  productiv- 
ity of  labor,  while  wages  depending  on 
supply  and  demand  escape  their  action 
whenever  advances  are  sought  which  the 
state  of  the  market  at  the  moment  does 
not  justify. 

In  the  cities,  rents  also  have  notably 
increased.  It  is  true  that  the  cost  of  local 
transportation  has  considerably  decreased 
at  the  same  time  that  the  cost  of  long- 
distance travel  has  been  decreasing,  and 
also,  except  very  recently,  the  cost  of 
freight  transportation. 

Statistics  Have 
World  Application 

The  foregoing  conclusions  are  based 
upon  French  statistics,  but  with  very 
slight  differences  as  to  dates  and  as  to 
the  sweep  of  the  movement,  the  general 
trend  is  the  same  for  all  Europe,  and  even 
to-day  for  America.  It  can  be  summed 
up  by  saying  that  the  level  of  prices,  in- 
cluding wages,  presents  a  marked  rise  dur- 
ing the  past  century.  Moreover,  this  gen- 
eral movement,  after  having  undergone  a 
considerable  slackening  in  the  last  quarter 
of  the  nineteenth  century,  and  especially 
from  1882  to  1897,  has  been  notably  em- 

66 


phasized  since  then.  Especially  true  of 
this  latter  period  is  the  fact  that  the  in- 
crease has  become  almost  universal  in 
character.  Technical  progress  may  con- 
tinue to  reduce  the  net  cost  of  many  in- 
dustrial and  agricultural  products,  but 
the  margin  is  no  longer  large  enough  to 
neutralize  either  the  increased  cost  and 
efficiency  of  manual  labor  or  the  increased 
demand  due  to  the  improved  condition  of 
the  working  classes. 

We  shall  not  inquire  here  into  the 
causes  of  this  general  rise  in  prices.  It 
may  be  remarked,  however,  that  if  the 
increase  or  decrease  in  the  relative  value 
of  products  or  of  different  services  results 
necessarily  from  causes  which  are  peculiar 
to  each,  a  movement  which  bears  at  the 
same  time  on  practically  all  prices  can 
hardly  be  explained,  except  as  the  result 
of  monetary  causes.  The  more  so  that 
these  causes  at  the  present  time  are  obvi- 
ous. The  increase  in  production  of  gold, 
added  to  the  development  of  methods  of 
payment  without  the  use  of  money  (notes, 
checks,  book  transfers,  etc.),  appears  for  a 
long  time  to  have  proceeded  faster  than 
that  of  the  need  for  money.  Although 
very  much  increased  by  the  working  of 
the  Siberian  deposits,  the  production  of 
gold  did  not  average  200  millions  of  francs 
annually  from  1840  to  1850.  Carried  by 
the  exploitation  of  California  and  Aus- 
tralia to  an  annual  average  of  673  millions 
between  1851  and  1870,  the  average  fell 
back  to  572  millions  between  1871  and 
1890,  but  since  that  time  the  Transvaal 
mines  have  increased  it  to  such  an  extent 
that  it  reached  1089  millions  between 
1891  and  1900,  1959  millions  between 
1901  and  1910,  and  finally  amounted  to 
2423  millions  for  the  year  1911.  An 
equal  increase  in  instruments  of  exchange 
must  necessarily  have  resulted  in  the 
diminution   of   the   purchasing   power   of 

67 


money,    that   is,   an   increase   of   general 
prices. 

If  the  production  of  gold  continues  to 
increase,  there  is  no  reason  to  doubt  that 
our  descendants  will  assist  at  a'  phenom- 
enon analagous  to  that  general  increase 
during  the  sixteenth  century  which  was 
the  consequence  of  the  enormous  influx 
of  precious  metals  resulting  from  the  dis- 
covery of  America,  and  which  raised  prices 
threefold,  according  to  some  writers,  and 
fivefold  according  to  others.  The  exist- 
ence at  the  present  time  of  a  larger  stock 
of  gold  than  four  centuries  ago,  the  co- 
lossal development  of  business  transac- 
tions, the  demonetization  of  silver  and  the 
diffusion  of  gold  in  the  Far  East,  serve 
actually  to  reduce  the  importance  of  the 
movement  to-day,  and  without  doubt  will 
continue  to  do  so  in  the  near  future.  Its 
effects  are  none  the  less  already  felt  and 
may  be  even  more  strongly  felt  in  the 
future. 

Railway  Rates 
Held  in  Check 

But  there  exists  one  industry,  the  rail- 
way industry,  whose  selling  prices  do  not 
by  the  sole  interplay  of  supply  and  de- 
mand follow  the  general  rising  movement 
under  which  it  pays  increased  prices  for 
all  the  things  which  it  buys,  notably  the 
wages  of  its  employes.  .  Railway  service 
is  a  public  service  which  practically  can  be 
organized  only  by  the  State,  or  by  grantees 
selected  for  the  purpose.  Eailway  opera- 
tion has  the  character  of  a  monopoly,  and 
when  a  country  endeavors  to  establish 
competition  the  only  result  is  to  divide 
the  benefits  of  the  monopoly  between  sev- 
eral enterprises.  As  a  result,  transporta- 
tion rates  cannot  be  left  to  free  action; 
they  must  result  from  tariffs  established 
by  the  Government  or  under  its  control. 
Even  in  Anglo-Saxon  countries  the  State, 
which  has  proceeded  upon  a  wholly  dif- 

68 


ferent  conception,  does  not  now  allow  the 
railways  the  same  freedom  of  action  ac- 
corded to  them  at  the  beginning,  a  free- 
dom which  has  resulted  in  a  control  al- 
ways arbitrary  in  character,  although  not, 
as  with  us,  contractually  defined. 

Under  these  conditions,  an  increase  in 
rates,  even  when  it  is  imposed  by  economic 
circumstances,  always  has  the  appearance 
of  a  unilateral  and  forcible  act.  This  act 
is  the  more  ill  received  by  public  opinion 
the  more  it  has  become  accustomed  to 
seeing  tariffs  go  almost  constantly  down 
in  a  movement  which  technical  progress 
and  the  elasticity  of  traffic  have  rendered 
nearly  universal.  States  have  only  rarely 
authorized  increased  tariffs  on  railways 
under  their  control,  and  when  they  have 
substituted  government  operation  for  op- 
eration under  concession  they  have  gen- 
erally sought  to  render  the  new  regime 
popular  by  rate  reductions.  Both  in 
England,  where  the  railways  desired  to 
compensate  themselves,  by  means  of  less- 
ening former  reductions  which  had  be- 
come obsolete  at  certain  points,  for  the 
new  reductions  imposed  upon  them  at 
other  points  to  diminish  rate  inequalities, 
and  in  the  United  States,  where  the  cor- 
dial relations  eventually  established  be- 
tween different  railway  systems  permitted 
the  suppression  of  abnormal  reductions 
brought  about  by  previous  competition 
over  certain  routes,  laws  have  intervened 
to  give  quasi-judicial  authorities  power 
to  oppose  such  increases.  The  freedom  of 
action  of  the  railway  companies  and  the 
mobility  of  their  tariffs,  which  has  so 
powerfully  contributed  to  the  economic 
development  of  the  American  continent  by 
facilitating  rapid  railway  growth,  are  no 
longer  tolerated  in  the  United  States, 
since  the  need  for  new  railways  is  less 
vividly  felt  than  the  need  of  equality  in 
the  treatment  accorded  competing  pro- 
ducers.    Increases  in  rates,  always  more 

69 


rare  than  decreases,  have  for  a  long  time 
been  extremely  exceptional  almost  every- 
where, and  have  become  rare  even  in 
America  during  later  years. 

Effect  of 
1907  Panic 

But  rapid  increases  in  operating  and 
construction  expenses  have  come  seri- 
ously to  modify  the  situation  in  a  number 
of  countries.  It  was  at  the  very  crisis 
which  followed  the  height  of  prosperity 
in  1906  and  1907  that  the  effect  of  this 
increase  was  most  severely  felt.  As  we 
have  frequently  stated  in  these  pages,  the 
movement  of  expenses  always  follows  that 
of  receipts,  but  at  a  slower  gait;  traffic 
progresses  by  spurts,  the  most  recent  of 
which  have  been  somewhat  in  advance  of 
the  date  set  for  them  under  the  periodical 
alternation  at  approximately  ten-year  in- 
tervals of  industrial  prosperity  and  de- 
pression. At  the  beginning  of  these  spurts 
the  railroads  meet  the  situation  as  best 
they  can  with  the  facilities  at  hand,  and 
it  is  only  when  they  have  ascertained 
where,  for  what  classes  of  traffic,  and  un- 
der what  conditions  the  needs  exist  that 
they  undertake  the  necessary  and  costly 
improvements  of  their  operating  facilities. 
Then,  when  the  slackening  of  traffic  ren- 
ders it  more  difficult  to  provide  for  the 
new  expenses,  they  endeavor  to  retrench. 
This  is  what  occurred  in  all  countries 
when  the  crisis  of  1907-1908  seriously 
affected  the  financial  status  of  most  of 
the  railway  systems.  But  the  results  of 
the  measures  adopted  to  realize  economies 
were  nullified,  when  business  again  be- 
came active  after  a  short  period  of  slack- 
ening, by  the  general  increase  in  prices. 
This  increase  is  no  doubt  in  part  tempo- 
rary with  regard  to  coal  and  metals,  but 
will  probably  be  permanent  with  regard 
to  wages ;  and  the  expenses  brought  about 

70 


by  the  increase  have  been  aggravated  by 
the  necessity  of  offsetting  reduction  in 
labor  output  by  means  of  added  facilities. 
It  was  under  these  conditions  that  the 
idea  of  raising  rates  gained  ground  and 
has  been  applied  in  a  number  of  countries. 
It  has  not  been  necessary  to  refer  to 
Germany,  where,  as  we  have  frequently 
shown  in  these  pages,  abundance  of  traffic, 
added  to  exceptionally  advantageous  con- 
ditions resulting  from,  the  configuration 
of  the  country  and  from  regulations  very 
favorable  to  the  railways,  assured  excel- 
lent results  even  with  a  relatively  expen- 
sive system  of  operation.  After  the  enor- 
mous falling  off  in  net  revenue  in  1908 
a  serious  effort  was  made  to  reduce  ex- 
penses; since  then  the  recovery  of  traffic 
has  been  sufficiently  strong  to  secure  for 
the  capital  invested  a  greater  return  in 
1911  than  the  maximum  realized  in  1906, 
although  capital  had  grown  three  and  one- 
half  billions  in  the  interval.  Meanwhile, 
in  the  smaller  German  States  where  the 
railways  are  less  prosperous  than  in  Prus- 
sia, the  question  of  raising  rates  has  been 
agitated  at  different  times.  Wiirttemburg, 
soon  after  the  unification  of  tariffs 
throughout  the  empire  in  1907,  increased 
the  price  of  fourth-class  tickets  in  1909 
from  2.5  centimes  to  2.875  centimes  per 
kilometer.  The  Prussian  Government 
withdrew  the  export  tariffs  on  coal,  but 
this  was  apparently  less  to  augment  re- 
ceipts from  coal  traffic  than  to  reserve 
that  commodity  for  national  industry. 
With  regard  to  internal  traffic,  the  Gov- 
ernment contented  itself  with  forcing  the 
public  to  pay  for  the  routing  of  freight 
shipments  over  longer  but  less  congested 
lines.  As  to  the  stamp  tax  on  bills  of 
lading  and  passenger  tickets  which,  estab- 
lished by  the  empire,  was  levied  for  pas- 
sengers at  a  progressively  higher  rate, 
according  to  class  of  accommodation,  this 
caused   much  disappointment,  since  pas- 

71 


sengers  simply  shifted  to  the  lower  classes, 
and  the  measure  has  had  the  character  of 
a  general  tax  rather  than  an  increase  in 
rates,  so  that  the  railway  administration 
of  the  several  German  States  have  suf- 
fered rather  than  profited  by  it. 

Conditions  in 
England 

In  England,  as  we  have  shown  (May 
number,  1913),  successive  interventions 
by  the  Government  at  the  time  of  the 
threatened  strikes  of  1907,  and  afterwards 
at  the  time  of  the  strike  of  1911,  caused 
the  companies  to  make  concessions  to  their 
employes  in  consideration  of  the  promise 
that  legal  facilities  would  be  afforded  them 
for  two  classes  of  relief  measures:  First, 
the  consummation  of  agreements  or  con- 
solidations that  would  permit  reductions 
in  expenses  by  suppressing  existing  compe- 
tition on  many  lines,  not  as  to  prices  (in 
this  respect  there  has  been  an  understand- 
ing for  a  long  time  among  the  railways), 
but  as  to  the  facilities  offered  to  the  pub- 
lic. Second,  increases  in  freight  rates.  A 
bill  presented  in  1912  which  covered  these 
two  points,  and  at  the  same  time  im- 
posed various  new  obligations  upon  the 
railway  companies,  did  not  pass.  The 
Government,  called  upon  to  fulfil  its  part 
of  the  agreement,  at  last  carried  a  bill 
through  both  chambers  which  consisted 
merely  of  a  brief  amendment  to  the  Act 
of  1891  by  virtue  of  which  the  Railway 
and  Canal  Commission  was  empowered  to 
oppose  all  unjustifiable  increases  of  freight 
rates.  This  amendment,  which  took  effect 
in  March,  1913,  declared  that  an  increase 
would  be  deemed  justifiable  when  it  should 
be  established  that  its  object  was  to  meet 
the  additional  expense  of  handling  goods 
resulting  from  increases  in  wages  and  im- 
provements in  working  conditions  since 
August  19,  1911  (date  of  the  strike). 

72 


Already,  in  January,  1912,  the  railways 
had  put  into  effect  certain  increases  in 
passenger  rates,  to  which  the  restrictive 
measures  of  1894  did  not  apply;  these 
very  moderate  increases  affected  only  cer- 
tain exceptional  passenger  tariffs.  Utiliz- 
ing the  new  privilege  granted  them  in 
regard  to  freight  rates,  they  put  into  ef- 
fect, on  July  1,  1913,  increases  equivalent 
to  a  general  surcharge  of  4  per  cent,  on 
all  traffic.  It  is  natural  that  the  cus- 
tomers of  an  industry  thus  suffer  the  con- 
sequences of  its  increased  net  cost;  this 
is  only  what  occurs  in  all  unregulated  in- 
dustries, whether  the  increase  results 
from  the  intervention  of  public  authority, 
so  frequent  nowadays  in  the  matter  of 
labor,  or  whether  it  proceeds  from  natural 
price  variations.  So  far  as  the  railways 
are  concerned  the  British  Government  has 
kept  its  promise  by  refraining  from  inter- 
posing legal  obstacles  which  would  have 
rendered  them  victims  of  the  pressure 
brought  upon  them  on  behalf  of  their  em- 
ployes. As  to  the  agreements  between 
different  railways  for  the  purpose  of  re- 
ducing expenses,  the  indefiniteness  of  the 
law  has  allowed  them  in  most  cases  to 
consummate  these  agreements  without  the 
necessity  of  new  legislation. 

Italy  Raises 
Railroad  Rates 

In  Italy,  as  in  England,  betterments 
of  the  conditions  of  the  laboring  force 
have  necessitated  increases  in  rates.  The 
old  leasing  system,  which  was  ended  in 
1905,  did  not  sufficiently  permit  the  rail- 
ways to  provide  the  means  for  necessary 
increases  in  equipment,  and  thus  made  it 
impossible  for  them  to  respond  to  traffic 
needs.  Direct  operation  by  the  Govern- 
ment, under  the  capable  and  energetic 
management  of  M.  Bianchi  and  a  fairly 
independent  administration,  has  notably 
improved  the  service.     But  expenses  have 

73 


gone  up  considerably,  for  the  most  part 
as  the  result  of  legislation  enacted  by  Par- 
liament under  pressure  from  railway  em- 
ployes, providing  for  increased  rates  of 
pay.  The  latest  of  such  laws,  enacted 
April  13,  1911,  provided  that  part  of  the 
new  charges  should  be  taken  care  of  by 
means  of  an  increase  in  the  price  of  term 
tickets  and  of  special  tickets  issued  at  un- 
usually low  rates.  These  increases  have 
produced  six  millions,  perhaps  a  little  over 
3  per  cent,  of  total  passenger  receipts.  At 
the  same  time  there  has  been  authorized 
an  increase  in  accessory  charges  on  freight 
amounting  in  the  aggregate  to  three  mil- 
lions, perhaps  a  little  over  1  per  cent,  of 
the  receipts  from  ordinary  freight.  This 
increase  has  for  its  object  the  creation  of 
a  reserve  of  4000  cars  for  the  transporta- 
tion of  agricultural  products. 

In  Switzerland,  a  law  passed  June  23, 
1910,  improved  the  conditions  of  railway 
labor  to  a  very  marked  degree;  its  appli- 
cation will  add  about  fourteen  millions 
to  a  wage  aggregate  amounting  to  sixty 
millions  in  1910.  Inasmuch  as  the  wage 
increases  provided  for  are  often  automatic, 
it  is  fair  to  ask  whether  the  service  will 
be  improved  along  with  the  condition  of 
the  employes.  On  the  other  hand,  the 
government  railway  administration  has 
put  into  effect  increases  running  from 
9  to  12^  per  cent,  on  certain  forms  of 
season  tickets  very  much  used  in  that 
country.  Other  increases  have  been  pro- 
posed, applying  to  round-trip  tickets,  but 
these  the  Federal  Government  has  not  ven- 
tured to  adopt. 

Measures  Taken 
in  Belgium 

In  Belgium  the  State  has,  for  several 
years,  been  endeavoring  to  offset  the  in- 
crease in  expenses,  brought  about  through 
increases  in  railway  wages,  by  increases 
in  rates.    The  stamp  tax  (droit  d'enregis- 

74 


trement),  which  in  France  is  but  ten 
centimes,  has  been  raised  from  twenty 
to  fifty  centimes.  Measures  have  been 
taken  to  prevent  such  combining  of  ship- 
ments as  permit  the  economical  transpor- 
tation of  small  consignments.  Finally, 
after  a  long  series  of  struggles  and  one 
first  ineffectual  attempt,  increases  of  fifty 
centimes  per  ton  have  been  imposed  upon 
short-haul  shipments  of  all  coals. 

In  Denmark  the  net  revenue  of  the 
state  system  declined  from  6300  francs 
per  kilometer  in  1905-1906  to  less  than 
2100  francs  in  1909-1910,  the  gross  rev- 
enue being  more  than  31,000  francs  per 
kilometer.  The  public  authorities  took 
steps  toward  putting  into  effect,  on  the 
first  of  December,  1911,  new  tariffs  which 
would  increase  total  revenues  about  9  per 
cent. 

In  Russia  ordinary  freight  rates  on  a 
large  number  of  manufactured  products 
were  considerably  raised  in  1910.  Some 
increases  were  also  made  with  respect  to 
passenger  rates.  But  on  account  of  the 
poverty  of  the  population,  these  latter  in- 
creases brought  about  a  reduction  of  pas- 
senger traffic  and  a  shifting  from  higher 
to  lower  classes  which  has  forced  a  partial 
abandonment  of  the  scheme. 

It  is  especially  in  Austria  and  in  Hun- 
gary that  a  considerable  sustained  effort 
has  been  made.  In  Austria  the  state  sys- 
tem, considerably  enlarged  by  the  policy 
of  purchase  of  railway  lines  which  has  led 
to  the  gradual  disappearance  of  all  the 
private  systems,  with  the  sole  exception  of 
the  Sudbahn,  has  been  far  from  earning 
the  interest  on  its  capital.  For  a  long 
time  the  Government  has  been  seeking  to 
increase  revenues  by  means  of  rate  in- 
creases. Some  years  ago  station  charges 
had  been  considerably  increased.  A  gen- 
eral reform  was  instituted  in  1910,  ap- 
plying both  to  freight  and  passenger  tar- 
iffs,  by   means   of   which    revenues   were 

75 


increased  ten  millions  the  first  year  and 
thirty-seven  millions  in  later  years.  But 
the  results  were  seriously  disappointing, 
and,  in  1911  and  1912,  new  and  important 
increases  were  effected,  bearing  partly 
upon  certain  special  classes  of  goods 
(cement,  lumber,  alcohol,  petroleum,  coal, 
sugar)  and  partly  on  merchandise  of  all 
classes  in  carload  lots. 

Hungary  Makes  General 
Rate  Increase 

In  Hungary  still  more  radical  meas- 
ures were  adopted.  In  1909  the  net  rev- 
enue of  the  state  system  was  forty-five 
millions  less  than  the  capital  charges. 
During  1910  and  1911  rates  on  a  ma- 
jority of  commodities  were  sensibly  in- 
creased. The  results,  though  satisfactory, 
remain  still  insufficient,  and  on  March  1, 
1912,  normal  fast  freight  rates  were  uni- 
formly raised  7  per  cent.,  exceptional  fast 
freight  rates  5  per  cent.,  and  all  ordinary 
freight  rates  also  5  per  cent.  Finally, 
the  celebrated  zone  tariffs  for  passengers, 
which  had  formerly  been  extolled  as  a 
great  step  forward,  were  completely  aban- 
doned. 

This  zone  system,  established  in  1889, 
was  destined  in  part  to  develop  local  pas- 
senger traffic  and  in  part  to  bring  the 
capital  of  Budapest  and  the  farthest  parts 
of  the  kingdom  into  closer  relations.  At 
the  beginning  there  were  two  zones  for 
local  passenger  traffic,  and  twelve  zones 
for  journeys  of  from  25  to  225  kilometers 
(each  carrying  a  uniform  rate  for  all  the 
points  within  a  fairly  wide  area,  the  rates 
increasing  at  successive  steps  either  of  15 
or  25  kilometers).  Finally,  there  was  a 
single. zone,  with  a  uniform  fare,  for  all 
journeys  over  225  kilometers,  even  up  to 
800  kilometers.  However,  there  was  a 
necessary  break  in  all  journeys  by  way 
of  Budapest.  This  tariff  produced  a 
species  of  traffic,  not  then  existent,  over 

76 


very  short  and  very  long  distances.  From 
1888  to  1894  the  state  railways  and  the 
Austro-Hungarian  Company's  lines  pur- 
chased by  the  State  in  1891  increased  their 
traffic  in  the  following  proportions: 

Per  cent,  of  increase  in 
Number  of         Passenger 
passengers  receipts 

Local  zones 650  232 

Zones  2  to  12 . . .       40  10 

Zones  13  to  15..     246  186 

But  when  the  long-distance  travel, 
hardly  existent  before,  had  developed  so 
seriously  as  this,  it  did  not  take  long  to 
ascertain  that  the  receipts  from  such 
travel  did  not  cover  the  corresponding  ex- 
penses. In  1896  and  1903  the  local  tariff 
was  altered  and  two  new  zones  created, 
one  of  75  and  one  of  100  kilometers,  so 
as  to  establish  a  complete  uniformity  of 
rates  only  beyond  400  kilometers.  Ex- 
perience shows  that  these  increases  have 
had  no  effect  on  the  growth  of  traffic. 

Under  these  conditions  passenger  traffic 
barely  made  expenses,  but  did  not  con- 
tribute, so  to  speak,  to  net  revenue.  On 
the  first  of  July,  1912,  the  zone  system 
of  tariffs  was  abolished.  Rates  are  now 
(with  a  few  exceptions)  increased  at  five- 
kilometer  intervals  for  trips  under  thirty 
kilometers,  and  at  ten-kilometer  intervals 
thereafter,  the  per-kilometer  rate  rapidly 
decreasing  above  250  kilometers.  The  in- 
creased revenues  resulting  from  this  new 
classification  amount  to  about  sixteen  mil- 
lion francs,  or  about  18  per  cent,  of  former 
passenger  receipts. 

Railroad  Policy 
in  France1 

It  is  clear  that  the  once  generally  ac- 
cepted idea,  that  railway  rates  must  al- 
ways continue  to  decline,  is  contrary  to 
the  facts.    In  France,  public  opinion  still 

77 


refuses  to  admit  that  rates  can  never  be 
increased.  However,  the  operating  results 
which  we  analyze  each  year  in  the  May 
number  of  this  Review  lead  us  to  fear 
that,  as  in  so  many  other  countries,  we 
shall  be  obliged  to  apply  higher  rates 
some  day.  From  1906  to  1912  the 
revenues  of  the  railways  d'interet  general 
increased  in  round  numbers  about  350 
millions,  while  operating  expenses  in- 
creased 400  millions,  and  the  capital  in- 
vested had  increased  about  two  billions. 
Of  this  increase  in  expenses,  the  follies 
that  have  accompanied  the  purchase  by 
the  State  of  the  Western  Railway  are  per- 
haps responsible  for  fifty  millions,  adding 
that  much  to  the  normal  increase  in  ex- 
penses which  the  government-operated 
systems  must  suffer,  as  well  as  the  private 
systems.  Even  after  deducting  these  fifty 
millions,  it  is  clear  that  the  increase  in 
expenses  entirely  absorbed  the  total  in- 
crease of  revenue.  The  operating  ratio  in 
1906  was  about  52  per  cent.  The  length 
of  the  new  and  slightly  productive  lines 
put  into  operation  in  the  interval,  upon 
which  this  ratio  is  necessarily  higher  than 
on  the  older  lines  of  dense  traffic,  is  hardly 
more  than  1000  kilometers.  On  the  other 
hand,  the  additional  traffic  of  the  older 
lines  would  not,  by  a  wide  margin,  have 
brought  an  increase  in  expenses  propor- 
tionate to  that  of  revenues,  had  not  the 
net  cost  of  transportation  grown.  On  the 
whole,  an  increase  in  expenses  equivalent 
to  half  the  increase  in  revenues  would 
have  been  the  expected  thing,  had  not  the 
conditions  of  operation  been  seriously 
changed. 

Among  the  changes  of  this  period  are 
those  whieh  represent  real  improvements, 
both  as  to  the  speed  and  the  number  of 
trains,  improved  car  accommodations,  and 
so  forth.  But  the  expenditures  undertaken 
by  the  railway  managements  on  this  score 
have  not  greatly  exceeded  the  economies 

78 


brought  about  through  technical  progress ; 
the  use  of  more  powerful  locomotives,  per- 
mitting an  increase  in  average  train  load, 
the  development  of  classifications  based 
upon  weight,  etc.  The  enormous  gap  be- 
tween the  results  actually  attained  and 
those  reasonably  expected  from  the  de- 
velopment of  traffic  is  due  chiefly  to  the 
general  increase  of  prices  and  especially 
of  wages. 

But  the  intervention  of  public  author- 
ity has  considerably  contributed  to  the 
increase.  We  have  often  spoken  of  the 
special  legislation  which  assures  railway 
employes  better  pensions  even  than  those 
granted  to  state  employes  themselves,  and 
incomparably  better  than  those  provided 
under  ordinary  legislation  for  workmen 
in  general,  without  even  that  contribu- 
tion from  the  budget  which  is  granted  to 
other  workers.  This  special  act  increased 
expenses  of  operation  from  twenty-five  to 
thirty  millions  a  year,  which  would  have 
been  infinitely  better  employed  in  the 
amelioration  of  wages — to  say  nothing  of 
eight  millions  carried  in  1912  to  capital 
account  on  behalf  of  employes  pensioned 
during  that  year,  nor  of  its  retroactive 
provisions,  nor  of  the  slowly  decreasing 
amounts  it  will  add  to  the  expenses  of 
future  years.  The  labor  regulations  im- 
posed upon  the  railways  have  also  added 
new  expenditures  over  and  above  those 
brought  about  by  such  increases  in  force 
as  have  been  necessitated  by  the  general 
movement  tending  toward  greater  leisure 
for  laborers. 

How  French 
Expenses  Increased 

The  law  of  1905,  regarding  the  liability 
of  carriers,  has  further  added  to  railway 
expenses,  by  means  of  payments  for  dam- 
age, to  the  extent  of  fifteen  millions  a 
year.  While  nullifying  the  contractual 
clause  which   combined   the  privilege  of 

79 


lower  rates  with  a  lessening  of  the  car- 
riers' liability,  the  law  has  very  much  re- 
duced the  number  of  cases  in  which  the 
Court  of  Cassation  can  exert  a  control 
over  the  decisions  of  judges  of  fact  of 
the  lower  courts.  However,  it  must  be 
recognized  that  these  judges,  when  elected 
by  patrons  of  a  railway,  do  not  always 
grant  it  all  the  necessary  guarantees. 
Doubtless,  in  the  large  cities,  the  com- 
mercial tribunals  exercise  their  authority 
with  entire  impartiality;  but  their  inde- 
pendence is  not  the  same  in  the  less  im- 
portant centers.  The  more  closely  they 
are  in  contact  with  the  merchants  who 
elected  them,  the  more  they  incline  to  side 
in  their  favor  against  enterprises  that 
are  foreign  to  the  region.  As  to  this, 
statistics  regarding  the  legal  suits  of  one 
of  our  great  railways  in  1910  and  1911 
are  singularly  instructive.  It  should  be 
noted  that  all  these  suits  are  prepared 
and  defended  by  -the  same  legal  claim  de- 
partment, which  examines  all  cases  in  the 
same  light  and  goes  to  law  only  when  it 
believes  that  there  are  good  chances  of  a 
victory.  Yet  the  proportion  of  legal  cases 
lost  by  it  before  commercial  tribunals  is 
as  follows: 

Per  cent. 

In  Paris  32.5 

In  other  cities  of  50,000  popula- 
tion and  over 46.6 

In  cities  from  10,000  to  50,000 

population  . . . , 60.9 

In    cities    of    less    than    10,000 
population 80. 

When  the  law  of  1905  had  overthrown 
one  of  the  conditions  made  by  the  rail- 
way systems  in  return  for  the  voluntary 
rate  reductions  introduced  by  them,  the 
Government  recognized  that  it  could  not 
insist  upon  these  reductions  without  some 
compensatory  arrangement.  The  Minister 
of  Public  Works  took  the  almost  unheard- 

80 


of  step  of  promulgating  increases  in  cer- 
tain rates  that  were  extremely  low  and 
were  due  for  revision  when  the  effects  of 
the  new  legislation  should  become  known. 
But  when  the  time  came  the  administra- 
tion directed  its  whole  weight  of  authority 
against  the  railways,  to  obtain  their  re- 
nunciation of  certain  surcharges  which 
it  was  impracticable  to  refuse  to  them  if 
they  should  insist  on  their  rights.  The 
railways  gave  in  upon  the  promise  that 
a  slight  compensation  would  be  gramted 
them  through  the  revision  of  certain 
tariff  regulations  much  more  burdensome 
to  them  than  really  beneficial  to  the  pub- 
lic. Then,  as  always,  when  it  was  pro- 
posed to  promulgate  certain  rules  facili- 
tating railway  service,  the  administration 
backed  down  in  the  face  of  demands  for- 
mulated not  so  much  by  large  shippers, 
seriously  interested  in  the  question,  as  by 
small  groups  who  receive  their  instruc- 
tions from  agencies  on  the  lookout  for 
opportunities  to  file  claims.  As  a  final 
result,  the  railways  obtained  nothing  in 
exchange  for  their  consent  to  the  mainte- 
nance of  special  tariffs,  even  in  cases  where 
the  evidence  itself  showed  that  the  pro- 
visions reducing  the  liability  of  carriers 
had  been  among  the  determining  condi- 
tions underlying  the  reductions  voluntar- 
ily agreed  to  by  them. 

Effect  of  Rising 
Interest  Rate 

Although  the  new  operating  expenses 
absorbed,  and  more  than  absorbed,  the 
increases  in  revenues,  the  amount  of  cap- 
ital grew  and  the  corresponding  charges 
grew  still  faster.  The  general  increase  in 
the  rate  of  interest  has  continued  simul- 
taneously with  the  increase  in  prices  for 
fifteen  years  past.  Of  late  it  is  especially 
with  regard  to  old  family  investments  that 
this  increase  has  been   manifested;    the 

81 


cost  of  living  has  forced  a  search  for  more 
productive  investments;  furthermore,  in 
the  face  of  financial  and  other  threats 
that  are  directed  from  all  sides  upon  ac- 
cumulated wealth,  the  difference  in  safety 
between  securities  once  regarded  as  abso- 
lutely sound  and  other  investments  no 
longer  seem  important.  Fifteen  years  ago 
the  rate  of  interest  (including  funding 
costs)  at  which  the  railways  borrowed 
hardly  exceeded  3.25  per  cent. ;  to-day 
they  can  no  longer  issue  securities  with- 
out paying  about  4  per  cent.  Retirement 
of  securities  becomes  more  difficult  in  the 
measure  by  which  the  end  of  the  period  of 
concession  approaches;  the  annual  amorti- 
zation charge  (l'annuite  des  emprunts) 
has  increased  by  0.50  to  0.75  per  cent, 
in  fifteen  years,  and  amounts  to  75-115 
centimes  to-day,  according  to  the  length 
of  time  yet  remaining  to  the  concession 
of  each  system,  and  the  charge  will  grow 
very  rapidly  unless  measures  are  taken 
to  render  possible  the  continuation  of  bet- 
terments indispensable  to  the  good  of  the 
service. 

Whether  the  increase  in  capital  charges 
and  expenses  of  operation  bears  directly 
upon  the  State  in  regard  to  its  own  sys- 
tem and  the  expenditures  assumed  by  it, 
through  the  construction  of  new  conces- 
sionary lines,  and  whether  it  "directly  af- 
fects the  railways  with  which  the  State 
is  closely  associated  through  guarantees 
of  interest  and  the  division  of  profits,  it 
reacts  no  less  gravely  upon  the  state 
budget.  For  other  reasons  as  well  the 
budget  is  affected  by  the  general  increase 
in  prices  and  wages,  being  drawn  upon 
especially  for  the  improvement  of  the 
working  conditions  of  all  public  employes 
— not  to  give  satisfaction  to  labor  associa- 
tions or  unions  whom  it  would  be  easy 
to  bring  to  their  senses,  but  because  the 
recruiting  of  civil  or  military  employes 
becomes  more  and  more  difficult,  and  will 

32 


become  impossible  if  they  are  not  prop- 
erly compensated.  The  new  military  bur- 
dens which  have  been  imposed  upon  us 
and  the  social  burdens  sometimes  impru- 
dently assumed,  added  to  those  which 
have  resulted  from  the  natural  movement 
of  prices,  forced  the  State  to  secure  new 
resources  for  immense  sums  never  re- 
quired before,  not  even  after  the  catas- 
trophe of  1871.  At  the  very  moment 
when  it  becomes  necessary  to  search  on 
all  sides  for  new  taxes  it  is  no  longer  pos- 
sil.le  to  discard  a  priori  any  idea  of  an 
increase  in  transportation  rates. 

The  Real  Problem 
in  Freight  Charges 

Without  doubt,  this  increase  will  bear 
grievously  upon  agriculture,  commerce 
and  industry.  But  under  whatever  form 
it  may  arrive,  the  new  burdens  imposed 
upon. national  production  will  fetter  that 
production.  To  burden  the  transportation 
industry,  or  to  tax  its  transactions,  or  to 
attenuate  its  capital,  all  tend  to  diminish 
the  productive  power  of  a  country;  the 
problem  is  to  so  distribute  the  load  as  to 
render  no  one  part  of  it  crushing.  A  cer- 
tain increase  in  railway  rates  must  never- 
theless follow  upon  a  general  increase  in 
prices,  such  as  was  described  at  the  be- 
ginning of  this  article.  Soon,  perhaps, 
the  State  will  no  longer  be  able,  in  fair- 
ness, either  to  refuse  the  increase  to  the 
railways,  in  whose  prosperity  it  is  di- 
rectly interested  as  a  partner,  or  to  con 
tinue  to  operate  its  own  system  at  a  con- 
tinuously increasing  loss.  Perhaps,  also, 
it  would  be  wise  to  use,  from  now  on, 
additional  transportation  charges  that  are 
relatively  low  and  well  selected  as  part 
of  the  resources  of  which  there  is  need, 
in  order  to  cover  at  least  the  interest  on 
the  capital  expended  to  develop  all  sorts 
of  means  of  communication. 

83 


The  memory  of  the  enormous  part  that 
has  been  played  by  the  considerable  de- 
crease in  transportation  rates  in  modern 
progress  must  not  iead  us  to  exaggerate 
the  inconvenience  of  a  slight  increase. 
The  experience  of  actual  increases  abroad, 
as  well  as  increases  of  transportation  taxes 
in  France  some  time  ago,  show  that 
charges  of  this  kind  are  not  especially 
prohibitive,  provided  they  be  moderate 
and  well  selected;  and  even  if  they  were 
to  bear  heavily  upon  passengers  traveling 
on  passes  or  special  tickets  (cartes  de  cir- 
culation), yet  they  constitute  a  valuable 
means  of  moral  uplift. 

What  is  of  significance  to  the  public 
welfare  is  not  that  a  special  form  of  serv- 
ice like  the  railway  service  is  left  out  of 
the  general  movement  of  increased  prices 
and  augmented  public  charges,  but  that 
these  charges  be  not  increased  without  ab- 
solute necessity.  The  policy  of  reducing 
transportation  rates  is  an  excellent  one, 
but  to  carry  it  out  it  is  necessary  to  avoid 
increasing  beyond  measure  the  charge 
upon  the  carriers,  the  expenses  of  opera- 
tions of  doubtful  utility  or  of  no  utility 
at  all,  and  even,  if  possible,  the  total 
budget.  On  the  other  hand,  when  it  be- 
comes absolutely  necessary  to  increase  the 
levy  made  by  the  public  power  upon  na- 
tional production,  the  users  of  means  of 
communication  of  all  kinds  should  justly 
and  inevitably  contribute  their  share,  at 
least  in  the  proportion  by  which  special 
legislation  and  the  general  increase  in 
prices  have  increased  the  net  cost  of  the 
services  rendered  to  them. 

This  is  what  many  countries  have  al- 
ready recognized.  It  looks  as  if  France 
also  will  soon  have  to  recognize  it. 


*    84 


3ULLETIN    No.    12 

The  Case  for  Increased  Railroad  Rates 


Methods  Observed  in  Advance 

of  Freight  Rates  in  Trunk 

Line  Territory 

December  16,  1913. 

The  railroads  have  published  complete 
tariffs  covering  the  proposed  advance  in 
freight  rates.  These  publications  involved 
a  reprinting  of  all  the  tariffs  on  many 
railroads.  In  order  that  the  exact  appli- 
cation of  the  proposed  increase  may  be 
better  understood,  the  railroads  have  filed 
with  the  Interstate  Commerce  Commission 
a  supplementary  statement,  prepared  by 
Mr.  C.  C.  McCain,  chairman  of  the  Trunk 
Line  Association,  describing  in  general 
terms  the  methods  observed  in  advancing 
"Trunk  Line"  rates. 

The  controlling  principle  was  to  bring 
about  a  uniform  advance  of  5  per  cent, 
on  all  class  and  commodity  traffic  via  the 
various  standard  and  differential  routes: 
( 1 )  from  all  eastern  points  to  Trunk  Line 
western  termini  and  points  beyond,  do- 
mestic and  import;  (2)  .from  western 
termini  of  the  Trunk  Lines  to  all  eastern 
points,  domestic  and  export,  and  (3)  be- 
tween all  eastern  interior  points. 

The  detailed  instructions  formulated 
for  this  purpose,  and  which  were  employed 
by  all  roads,  were  as  follows: 

In  computing  and  publishing  all  revised 
class  and  commodity  rates  in  cents  per  100 
pounds,  decimals  of  tenths  to  be  employed. 

In  figuring  advanced  per  ton  rates,  fractions 
of  1  cent  per  ton  to  be  disposed  of  by  dropping 
49  hundredths  of  1  cent  or  less  per  ton  and 
increasing  50  hundredths  or  more  per  ton  to  1 
cent. 

The  minimum  advance  in  the  per  ton  rate* 
to  be  5  cents  per  ton  and  *4  cent  for  rates  in 
cents  per  100  pounds  erpressed  in  decimals. 

85 


In  computing  through  westbound  rates,  the 
New  York-Chicago  rate  will  first  be  advanced 
5  per  cent.,  and  other  Western  points  taking  a 
percentage  of  the  New  York-Chicago  rate,  will 
take  the  established  percentage  of  the  new  ad- 
vanced Chicago  rate,  with  the  understanding 
that  port  differentials  heretofore  established 
and  recognized  will  be  continued. 

In  computing  other  rates  not  based  on  a 
percentage  of  the  New  York-Chicago  rate,  rec- 
ognised differentials  above  or  below  advanced 
basing  rates  will  be  maintained. 

The  new  rates,  generally,  were  con- 
structed in  accordance  with  the  foregoing ; 
there  were,  however,  certain  exceptions  to 
the  strict  application  of  the  5  per  cent,  in- 
crease which  were  regarded  as  necessary 
in  order  that  the  long-established  competi- 
tive rate  relations  as  between  the  principal 
shipping  points  and  via  various  routes 
should  remain  substantially  as  before. 
Typical  instances  of  these  exceptions  are 
given,  as  follows: 

Under  existing  methods  governing  the 
west-bound  rates  from  the  seaboard,  cer- 
tain differentials  have  applied  as  between 
the  Atlantic  ports,  known  as  port  differen- 
tials, under  which  the  rates  from  Phila- 
delphia and  Baltimore  and  points  taking 
the  same  rates  to  western  points  have  been 
stated  amounts  lower  than  the  rates  cur- 
rently in  effect  from  New  York.  Instead 
of  computing  the  advanced  rates  upon  the 
existing  rates  from  Philadelphia  and  Bal- 
timore, the  new  rates  have  been  obtained 
by  observing  the  existing  differentials  un- 
der the  new  rates  established  from  New 
York,  and  while  this  process  results  in 
some  variation  from  an  actual  5  per  cent, 
advance,  the  average  advance  will  not  ma- 
terially exceed  5  per  cent.  Under  the  new 
basis,  the  rates  from  Philadelphia  and 
Baltimore    and    points    taking    the    same 

86 


rates  will  bear  the  same  relation  to  the 
rates  from  New  York  as  now  prevailing. 

From  New  York,  Boston,  Philadelphia 
and  Baltimore,  rates  are  published  by  va- 
rious differential  routes,  such  as  rail-and- 
lake,  ocean-and-rail,  and  eanal-and-lake; 
as  the  case  may  be,  the  rates  via  these 
routes  being  specified  amounts  under 
those  of  the  standard  all-rail  routes. 
When  computing  the  new  rates,  the  dif- 
ferential relation  of  these  several  routes 
has  been  maintained  as  heretofore,  the 
rates  of  the  standard  routes  having  been 
first  advanced  5  per  cent,  and  those  of  the 
differential  *  routes  then  obtained  by  de- 
ducting therefrom  the  established  differ- 
entials. This  method  operates  to  pro- 
duce slight  variations  from  the  exact  ad- 
vance of  5  per  cent,  via  such  routes. 

For  many  years  the  rates  from  eastern 
seaboard  and  interior  points  to  points  in 
Central  Freight  Association  territory 
have  been  constructed  under  what  is 
(  known  as  the  westbound  percentage  scale, 
by  which  the  rates  to  such  points  have 
been  determined  under  assigned  percent- 
ages of  the  current  rates  New  York  to 
Chicago;  for  example,  the  percentages  of 
several  points  are  as  follows:  Peoria,  110 
per  cent. ;  St.  Louis,  117  per  cent. ;  Cincin- 
nati, 87  per  cent.;  Indianapolis,  93  per 
cent. ;  Detroit,  78  per  cent.,  and  Grand 
Kapids,  96  per  cent,  of  the  rates  New 
York  to  Chicago.  When  computing  the 
new  rates,  this  percentage  method  was  ob- 
served, the  result  being  lees  variation  in 
the  relation  of  rates  as  between  western 
points  than  under  the  method  of  applying 
the   5   per  cent,   increase   to   the  former 

87 


rates  to  such  points,  and  a  close  approxi- 
mation to  the  advance  of  5  per  cent. 

The  former  rates  from  eastern  interior 
points,  such  as  Albany,  Syracuse,  Bing- 
hamton,  etc.,  have  similarly  been  made 
under  a  fixed  percentage  relation  to  those 
from  seaboard  points,  and  in  order  to  con- 
tinue this  relation,  the  same  method  has 
been  observed  in  computing  the  advanced 
rates  from  such  origin  points.  The  ob- 
servance of  this  plan  in  connection  with 
the  new  rates  has  resulted  in  slight  varia- 
tions from  an  actual  5  per  cent,  advance. 

It  was  regarded  as  desirable  to  pre- 
scribe a  minimum  advance  per  100  pounds 
or  per  ton.  The  minimum  prescribed,  as 
shown  above,  was  one-quarter  cent  per  100 
pounds,  or  5  cents  per  ton.  Where  exist- 
ing rates  were  of  small  amount,  the  appli- 
cation of  this  minimum  has  operated  to 
increase  such  rates  more  than  5  per  cent. ; 
for  example,  the  rate  of  20  cents  per  ton, 
to  which  a  minimum  of  5  cents  is  added, 
produces  25  cents,  the  advance  being  25 
per  cent.  Variations  of  this  character  will 
occur  in  sundry  rates  of  low  amount,  but 
usually  as  between  points  where  the  traffic 
involved  is  not  large  and  would  not  there- 
fore materially  affect  the  general  average 
of  the  5  per  cent,  increase. 

There  are  many  instances  throughout 
eastern  territory  where  through  rates  to 
points  on  different  roads  are  constructed 
on  basis  of  adding  to  the  rates  to  the  junc- 
tion points  certain  arbitrary  rates.  The 
rates  to  these  junction  points  have  in  all 
instances  been  advanced,  and  in  certain 
cases  the  arbitraries  beyond .  junction 
point*    have    been     similarly    advanced. 

86 


Where  such  arbitraries  were  not  advanced, 
the  revised  through  rates  were  increased 
only  to  the  extent  of  the  advance  to  the 
junction  points,  which  was  not  equivalent 
to  a  full  5  per  cent,  advance  in  the 
through  rate. 

The  rates  from  Albany,  Syracuse,  Bing- 
hamton  and  other  interior  points  to  west- 
ern points  bear  a  certain  relation  to  the 
rates  from  New  York  or  Buffalo  to  the 
same  western  points.  Similarly,  the  rates 
from  eastern  points  to  Cincinnati,  In- 
dianapolis, Columbus  and  St.  Louis  bear 
a  stated  relation  as  compared  to  Chicago 
and  as  compared  with  each  other. 

These  relations  are  recognized  as  long- 
established  factors  in  commercial  opera- 
tions, and  it  is  understood  that  it  would 
be  preferable  from  the  public  standpoint 
that  they  should  be  continued  rather  than 
that  the  increase  should  be  computed  di- 
rectly upon  the  existing  rates  to  such 
points,  although  the  observance  of  the 
present  plan  results  in  variations  from  an 
exact  5  per  cent  advance. 

The  new  rates  to  various  western  points 
from  Philadelphia  and  Baltimore  are  com- 
puted by  employing  the  New  York- Chi- 
cago rates  as  the  basic  rates  and  then  ob- 
serving the  differential  relation  govern- 
ing at  Philadelphia  and  Baltimore  under 
New  York,  and  also  observing  the  percent- 
age group  system  as  governing  at  western 
points. 

It  is  believed  that,  notwithstanding  the 
variations,  the  application  of  the  new 
rates  to  the  entire  traffic  affected  will  very 
closely  approximate  an  advance  of  5  per 
cent. 

89    . 


The  Case  for  Increased  Railroad  Rates 


Proposed  Rate  Advances  in 
the  Middle  West 

December  18,  1913. 

In  order  that  there  may  be  a  clear 
understanding  of  the  method  of  applying 
the  proposed  5  per  cent,  increase  in 
freight  rates  to  the  complicated  rate 
structure  in  the  Middle  West,  the  rail- 
roads have  filed  with  the  Interstate  Com- 
merce Commission  a  statement  prepared 
by  Mr.  E.  Morris,  Chairman  of  the 
Central  Freight  Association. 
*     *     *     * 

Class  Rates  in 

C.  F.  A.  Territory 

The  class  rates  between  points  within 
Central  Freight  Association  territory, 
both  intrastate  and  interstate,  were,  ex- 
cept as  may  be  hereafter  stated,  increased 
as  follows:  Eates  5%  cents  per  100  lbs. 
and  less  were  increased  a/4  of  one  cent; 
rates  in  excess  of  5%  cents  were  increased 
5  per  cent.;  minimum  increase,  %  cent 
per  100  lbs. 

An  exception  to  an  increase  of  5  per 
cent.,  literally  speaking,  is  the  employ- 
ment of  the  established  differentials  from 
Youngstown   and   Cleveland   rate   points. 

A  second  exception  to  the  literal  in- 
crease of  5  per  cent,  is  the  intrastate  class 
rates  applying  between  points  in  the 
Lower  Peninsula  of  Michigan  and  also 
the  interstate  rates  applying  between 
points  in  the  Lower  Peninsula  of  Michi- 
gan, and  certain  points  in  northern  sec- 
tions of  Indiana  and  Ohio  adjacent  to 
Southern  State  Line  of  Michigan,  which 

90 


were  affected  by  the  basis  announced  for 
recheck  of  the  intrastate  rates  between 
points  in  the  Lower  Peninsula  of  Michi- 
gan. 

The  rates  from  and  to  Louisville, 
Owensboro,  Henderson  and  Paducah, 
Ky.,  which  were  made  subject  to  estab- 
lished arbitraries  in  excess  of  the  increased 
rates  published  from  and  to  the  usual 
Ohio  River  base  points  in  cases  where 
arbitraries  were  used  in  obtaining  present 
rates. 

Still  another  exception  to  an  increase 
of  5  per  cent,  are  the  rates  proposed 
between  Buffalo,  N.  Y.,  Erie,  Pa.,  Sala- 
manca, N.  Y.,  Pittsburgh,  Pa.,  Wheeling, 
W.  Va.,  and  points  taking  same  rates, 
and  points  contained  in  territory  taking 
higher  than  100  per  cent.,  and  some  points 
taking  100  per  cent,  of  rates  applying 
from  Chicago  to  New  York  City.  The 
rates  between  these  points  were  advanced 
subject  to  established  percentage  of  the 
increased  rates  proposed  from  same  origin 
points  to  New  York  City. 

Glass  Rates 
Extra  Territorial 

The  rate  increase,  in  so  far  as  it  ap- 
plies where  joint  through  rates  are  in 
effect  from  and  to  south,  southwest  and 
northwest,  is  as  follows: 

(Northwest.)  The  rates  between 
points  located  in  territory  East  of  the 
Indiana-Illinois  State  Line  and  points  in 
Wisconsin,  Eastern  Minnesota  and  Upper 
Peninsula  of  Michigan,  taking  Winona, 
St.  Paul,  Duluth  (Minn.),  Marquette, 
Hancock,  Houghton,  Michigamme  and 
Sault  Ste.  Marie  (Mich.),  rates  were  in- 

91 


creased  to  the  extent  of  the  increase  made 
in  the  rates  applying  between  Pittsburgh 
and  Chicago. 

The  rates  applying  between  Buffalo 
and  Pittsburgh  rate  points  and  Lexing- 
ton and  Winchester,  Ky.,  groups  were 
advanced  subject  to  the  usual  percentage 
of  the  increased  basing  rates  announced 
to  apply  between  Lexington  and  New 
York  City. 

(Southwest.)  The  joint  through 
rates  applying  from  territory  above  de- 
scribed located  east  of  the  Indiana-Illinois 
State  Line  to  Arkansas  and  other  South- 
western territory  are  to  be  increased  to 
the  extent  of  the  increase  made  east  of 
St.  Louis  on  the  5  per  cent,  advance. 

Commodity  Rates 
in  C.  F.  A.  Territory 

The  commodity  rates  applying  between 
points  in  this  territory,  both  intrastate 
and  interstate,  were  also  advanced  in  the 
same  manner  as  class  rates.  The  differ- 
ential adjustments  were  used  from  west- 
ern Pennsylvania,  eastern  and  southern 
Ohio. 

The  commodity  rates  now  published 
between  points  in  this  territory  on  basis 
of  percentage  of  established  class  rates 
will  continue  to  be  made  on  same  per- 
centage basis,  but  subject  to  the  class 
rates  increased  on  basis  mentioned  above. 

Commodity  Rates 
Extra  Territorial 

The  extent  to  which  the  joint  through 
commodity  rates  applying  from  and  to 
South,  Southwest  and  Northwest  were 
increased  is  as  follows: 

92 


(Northwest.)  The  joint  through 
commodity  rates  published  between  points 
located  in  territory  mentioned  above  east 
of  the  Indiana-Illinois  State  Line  and 
points  in  Wisconsin,  eastern  Minnesota 
and  Upper  Peninsula  of  Michigan,  taking 
Winona,  St.  Paul,  Duluth  (Minn.),  Mar- 
quette, Michigamme,  Houghton,  Han- 
cock and  Sault  Ste.  Marie  (Mich.),  rates 
were  advanced  amounts  equal  to  the  in- 
crease made  in  the  commodity  rate  apply- 
ing between  Chicago  and  points  east 
thereof. 

In  some  cases  the  advance  made  in 
the  commodity  rate  from  or  to  Chicago 
(as  the  case  may  be)  and  the  base  point 
east  thereof  was  the  measure  of  the  in- 
crease made  in  the  joint  through  rates 
published  on  same  commodity  from  all 
points  in   respective  origin  territories. 

(To  Trans-Mississippi  River  Terri- 
tory.) The  joint  through  commodity 
rates  from  territory  located  east  of  the 
Illinois-Indiana  State  Line,  to  Trans- 
Mississippi  River  territory,  Montana, 
Wyoming,  Colorado,  Oklahoma  and  east 
thereof,  to  which  joint  through  com- 
modity rates  are  published  from  said 
origin  territory,  were  advanced  to  the 
extent  of  the  increase  made  in  the  rates 
from  the  base  or  origin  points  mentioned 
(as  case  may  be)  to  the  junction  of  Cen- 
tral Freight  Association  and  Western 
roads  which  was  used  as  the  western  base 
point.  *     *     *     * 

Through  rates  made  on  combination  of 
locals  or  proportional  rates  were  increased 
to  extent  of  increase  made  in  the  locals 
or  proportional  rates  applicable  from  and 
to  the  base  point  used. 

93 


Rail-and-Lake 
Rates— Class 

The  class  rates  from  points  in  Western 
New  York  and  Pennsylvania,  Ohio, 
Indiana,  etc.,  to  points  named  in  caption 
were  advanced  on  basis  as  follows: 

First — Combination  of  locals  on  in- 
creased basis  to  and  from  Lake  Erie  porta 
were  used. 

Second — Baltimore  rates  on  increased 
basis  were  applied  as  maxima. 

Third — The  usual  grouping  and  ad- 
justments were  observed. 

Fourth — Customary  differentials  below 
all-rail  rates  were  applied. 

Rail-and-Lake 
Rates— Commodity 

The  commodity  rates  were  obtained  as 
f  ollow8 : 

Manufactured  Iron  and  Steel  Articles 
— Rates  were  increased  subject  to  fore- 
going principle  as  mentioned  for  clasa 
rates. 

Cast  Iron  Pipe — Bates  were  increased 
subject  to  usual  differentials  under  all- 
rail  rates  from  base  points  to  St.  Paul, 
Minn. 

Miscellaneous  Commodities  —  Joint 
Through  Rates  were  increased  5  per  cent. 

Rates  from  C.  F.  A. 
Territory  to  Trunk  Line 
Territory  —  Class 

The  class  rates  from  Chicago,  111.,  to 
New  York  City  were  increased  5  per  cent 

The  class  rates  from  other  points  in 
Central  Freight  Association  territory  to 
New  York  City  were  increased  subject 
to    the    established    percentage    of    the 

94 


i 


advanced  basing  rates  as  named  above  to 
apply  from  Chicago  to  New  York  City. 
.  The  rates  to  interior  Eastern  basing 
points  were  computed  subject  to  the 
established  percentage  of  the  advanced 
basing  rates  to  New  York  City. 

The  rates  to  Boston  rate  territory  are 
made  subject  to  the  following  arbitraries 
in  excess  of  the  advanced  rates  to  New 
York  City: 

1      2      3      Jf      6      6  Classes. 

Cents  per 
100  lbs. 

The  advanced  rates  to  Philadelphia 
rate  points  are  made  subject  to  an  arbi- 
trary of  2  cents  per  100  pounds  for  all 
classes  below  the  increased  rates  to  New 
York  City;  and  the  advanced  rates  to 
Baltimore  rate  points  are  made  subject 
to  an  arbitrary  of  3  cents  per  100  pounds 
below  the  increased  rates  to  New  York 
City. 

The  advanced  rates  to  Newport  News 
and  Norfolk  rate  points  are  the  increased 
rates  to  Baltimore,  except  from  certain 
territory  located  south  and  east  of  Co- 
lumbus, Ohio.  From  this  excepted  terri- 
tory the  usual  practice  was  observed  and 
the  increased  rates  from  Columbus,  Ohio, 
to  Baltimore,  Md.,  arc  applied  as  minima 
to  Virginia  cities. 

Rates  from  C.  F.  A. 
Territory  to  Trunk  Line 
Territory— Commodity 

The  commodity  rates  (which  are  com- 
monly understood  to  mean  rates  appli- 
cable on  articles  that  are  not  subject  to 
the   established    class   rates   governed   by 

95* 


Official  Classification)  from  origin  points 
west  of  Buffalo  and  Salamanca,  N.  Y., 
Pittsburgh,  Pa.,  Parkersburg  and  Charles- 
ton, W.  Va.,  to  points  east  thereof,  were 
also  advanced  subject  to  5  per  cent,  in- 
crease in  the  basing  rates  applying  to  New 
York  City. 

Where  a  basing  rate  existed  from 
Chicago  to  New  York  City,  such  basing 
rate  was  advanced  5  per  cent.,  and  the 
rates  in  effect  from  other  points  in  said 
origin  territory  to  New  York  City  were 
computed  on  the  established  percentage 
of  the  advanced  basing  rate  from  Chicago 
to  New  York  City. 

Where  there  are  commodity  rates  from 
origin  points  located  in  Central  Freight 
Association  territory  and  no  commodity 
rates  are  now  published  from  Chicago  on 
like  traffic,  such  commodity  rates  from 
each  origin  point  to  New  York  City  were 
advanced  5  per  cent. 

The  rates  to  interior  Eastern  basing 
points  were  computed  subject  to  the 
established  percentage  of  the  advanced 
basing  rates  to  New  York  City,  except 
where  the  present  rates  may  have  been 
arrived  at  subject  to  different  procedure, 
in  which  event  such  procedure  was 
observed  in  publication  of  increased  rates. 

Export  Rates 

The  rates  on  by-products  of  grain,  etc., 
from  points  located  in  territory  described 
under  Section  1,  when  for  export,  were 
advanced  as  follows: 

From  Chicago  to  New  York  City,  the 
basing  rate  was  increased  5  per  cent. 

From  points  taking  100  per  cent,  and 

96 


less,  the  increased  rates  were  obtained  as 
follows : 

To  New  York  City,  established  per- 
centage of  the  increased  rates  from 
Chicago  to  New  York  City. 

To  Boston,  Philadelphia,  Baltimore, 
Newport  News  and  Norfolk,  the  usual 
rule  was  observed. 

From  points  west  and  south  of  Chicago 
taking  in  excess  of  100  per  cent,  of 
Chicago  to  New  York  rate,  the  arbitraries 
above  referred  to  were  added  to  the  in- 
creased rates  from  Chicago. 

Rail— Lake-and-Rail 
Rates 

The  rates  from  points  in  Western 
Indiana,  also  Illinois  and  on  Mississippi 
River  to  Buffalo,  Salamanca,  N.  Y., 
Pittsburgh,  Pa.,  and  points  east  thereof, 
were  advanced  subject  to  established 
differentials  less  than  the  all-rail  rates 
on  the  increased  basis. 

Rail-and-Ocean 
Rates 

The  rates  from  points  in  Central 
Freight  Association  territory  to  North 
Atlantic  Seaboard  ports  were  advanced 
subject  to  the  established  differentials 
less  than  the  all-rail  rates  on  increased 
basis. 

The  rates  to  eastern  points  which  make 
on  arbitraries  over  rates  to  the  base  point 
will  continue  to  be  made  in  the  same 
manner  subject  to  the  increased  rate  to 
the  base  point. 


97 


JLLETIN    NO.    14 


The  Case  for  Increased  Railroad  Rates 


Methods  of  Adjusting  Increased 
Coal  Freight  Rates 

December  20,  1913. 

In  order  that  the  methods  pursued  in 
adjusting  the  proposed  5  per  cent,  in- 
creased freight  rates  to  the  coal  rate 
structure  may  be  clearly  understood,  the 
railroads  interested  have  filed  with  the 
Interstate  Commerce  Commission  two  gen- 
eral statements.  The  first  of  these,  relating 
more  particularly  to  the  Eastern  territory, 
was  prepared  by  Mr.  R.  H.  Large,  General 
Coal  Freight  Agent  of  the  Pennsylvania 
Railroad  Company.  The  substance  of  Mr. 
Large's  statement  is  as  follows: 
I. 

The  instructions  received  from  the 
Executive  Committee  of  the  Trunk  Line 
and  Central  Freight  Associations  re- 
quired that  a  general  advance  be  made 
of  5  per  cent.,  with  a  minimum  of  5  cents 
per  ton,  the  existing  differentials  to  be 
preserved. 

It  was  determined  by  the  coal  traffic 
officers : 

(1)  That  wherever  port  or  regional  differen- 
tials existed,  in  making  the  5  per  cent,  advance 
Buch  differentials  should  be  preserved. 

(2)  That  fractions  of  49/100  of  one  cent 
should  be  dropped,  and  where  the  straight 
5  per  cent,  figured  50/100  of  one  cent,  a  cent 
should    be    added. 

Bituminous  Coal  Rates 
Eastbound 

( 1 )   Tidewater. 

The  existing  rates  on  Bituminous  coal 
to  the  Atlantic  seaboard  for  trans-ship- 
ment by  water  to  coastwise  or  export 
destinations  from  the  various  fields  of 
origin  hereinafter  designated  to  the  sev- 

98 


eral  ports  of  trans-shipment,  which  rates 
have  existed  since  May  1,  1907,  are  as 
follows : 

From  the  Georges  Creek  and  Cumber- 
land, Upper  Potomac,  Austen-Newburgh, 
Meyersdale,  Somerset  and  Clearfield 
regions : 

To  Baltimore,  f.  o.  b.  vessels,  $1.18  per 
gross  ton. 

To  Philadelphia,  f .  o.  b.  vessels,  $1.25 
per  gross  ton. 

To  the  lower  New  York  Harbor  ports 
of  South  Amboy,  Elizabethport,  etc., 
$1.55  per  gross  ton. 

To  the  upper  New  York  Harbor  ports, 
$1.60  per  gross  ton. 

From  the  New  River  and  Pocahontas 
districts  to  Hampton  Roads,  via  the 
Chesapeake  and  Ohio  Railway,  Norfolk 
and  Western  Railway  and  Virginian  Rail- 
way, $1.40  per  gross  ton. 

While  the  basic  rate  to  tidewater  is  the 
rate  from  the  Georges  Creek  and  Cum- 
berland region  to  Baltimore,  via  the 
Baltimore  and  Ohio  Railroad,  of  $1.18 
per  gross  ton,  it  may  be  said  that  the 
basing  rate  is  the  $1.25  rate  to  Philadel- 
phia, on  which  rate  the  differentials  to 
the  several  other  ports  are  based. 

*     *     * 

As  a  straight  5  per  cent,  advance  in 
the  aforesaid  rates  would  have  resulted 
in  an  advance  of  8  cents  in  the  $1.55 
rate  to  New  York  Harbor,  of  7  cents  in 
the  $1.40  rate  to  Hampton  Roads  and  of 
6  cents  in  the  $1.25  and  $1.18  rates  to 
Philadelphia  and  Baltimore,  and  as  it 
was  essential  that  the  prevailing  differ- 

99 


entials  to  the  several  ports  should  be  pre- 
served, it  was  determined  to  advance  the 
tidewater  rates  based  on  the  average  rate 
to  all  ports. 

Adding  the  five  before-mentioned  rates 
together  and  dividing  by  five  gives  an 
average  rate  of  $1,396  per  gross  ton,  5  per 
cent,  of  which  would  be  7  cents  per  ton, 
the  equivalent  of  a  5  per  cent,  advance 
in  the  $1.40  rate  to  Hampton  Roads.  It 
was  therefore  determined  to  advance  the 
tidewater  rates  7  cents  per  ton.  Thus, 
while  the  rate  to  Hampton  Roads  would 
be  advanced  exactly  5  per  cent.,  the  rate 
to  New  York  Harbor  less  than  5  per 
cent.,  and  the  rates  to  Philadelphia  and 
Baltimore  slightly  more  than  5  per  cent., 
the  port  differentials  are  preserved. 

It  was  further  understood  that  the 
existing  regional  differentials  over  and 
above  the  aforesaid  rates  from  the  Georges 
Creek  and  Cumberland,  Austen-New- 
burgh,  Meyersdale,  Somerset  and  Clear- 
field regions,  and  from  the  New  River  and 
Pocahontas  regions,  should  be  preserved. 
For  example,  the  rates  to  Baltimore, 
Philadelphia  and  New  York  Harbor  from 
the  Greensburg  district  are  10  cents  per 
ton  above  the  rates  from  the  Clearfield 
region ;  from  the  Westmoreland  and  Fair- 
mont regions,  25  cents  above  the  rates 
from  the  Clearfield  region,  etc. 

Those,  as  well  as  all  other  regional 
differentials  to  tide,  were  preserved,  so 
that  all  rates  on  Bituminous  coal  to  the 
Atlantic  seaboard  for  trans-shipment  into 
vessels  for  coastwise  or  export  trade  were 
advanced  a  straight  7  cents  per  ton — i.  e., 

100 


an  average  advance  of  5  per  cent,  on  the 
minimum  rate  to  tide,  which  of  course 
yields  materially  less  than  a  5  per  cent, 
advance  on  the  average  rate  to  tide. 

(2)  All-Rail — New  England. 

It  was  further  determined,  using  as  the 
basing  rate  the  minimum  rate  (which  is 
the  Clearfield-Somerset  rate),  to  advance 
the  all-rail  rates  to  New  England  a 
straight  5  per  cent.,  observing  the  rule 
with  respect  to  fractions  decided  upon, 
and  that  the  inland  rates  from  the  ports 
of  entry  in  New  England  to  the  interior 
of  New  England  should  be  advanced  5  per 
cent.,  with  a  minimum  of  5  cents  per 
ton,  by  the  New  York,  New  Haven  and 
Hartford  Railroad  Company,  the  Boston 
and  Maine  Railroad  Company  and  others. 

(3)  All-Rail  —  Eastern  Rates  Other 
Than  New  England. 

The  all-rail  rates  to  eastern  destina- 
tions in  New  York  State,  Pennsylvania, 
New  Jersey,  Delaware,  Maryland,  Vir- 
ginia and  the  District  of  Columbia,  and 
into  Canada  via  the  so-called  St.  Law- 
rence River  gateways,  were  advanced  a 
straight  5  per  cent.,  using  as  the  basing 
rate  the  so-called  Clearfield-Somerset- 
Meyersdale  rate,  and  the  regional  differ- 
entials over  and  above  that  rate  were  pre- 
served both  in  the  all-rail  rates  to  New 
England  and  in  the  all-rail  rates  to  the 
other  territory  referred  to. 

Northbound 

The  rates  to  the  Biiffalo  district  were 
advanced  6  cents  per  ton,  that  being  5  per 

101 


cent,  on  the  minimum  rate,  i.  e.,  the  rate 
from  the  Reynoldsville  district  of  $1.10, 
and  likewise  5  per  cent,  on  the  maximum 
fate,  i.  e.,  the  rate  from  the  Pittsburgh 
district  of  $1.25.  This  advance  of  6  cents 
per  ton  was  likewise  made  in  the  propor- 
tions of  the  through  rates  to  the  north 
aide  of  Lake  Erie  in  such  joint  rates  as 
were  published  into  Canada  via  Ashtabula 
and  other  Lake  Erie  ports  and  across 
Lake  Erie  car  ferry  routes,  thus  preserv- 
ing the  existing  relation  between  the 
all-rail  rates  via  those  routes  and  the  com- 
bination of  the  rates  to  and  beyond  Black 
Rock. 

Westbound 

(1)  Cargo  Coal  Rates. 

The  existing  rates  on  Bituminous  coal 
from  the  several  fields  of  origin  to  Lake 
Erie  ports  for  trans-shipment  as  cargo 
up  the  Great  Lakes  are  as  follows: 

Per  Net  Ton. 

Prom  the  Pittsburgh  district   $  .78 

From  the  Ohio  district 75 

From  the  Fairmont  district 90 

From  the  Kanawha     and     Thacker 

districts 97 

From    the    Pocahontas    and     New 

River  districts 1.12 

As  the  rates  from  the  Pittsburgh,  Ohio, 
Fairmont,  Kanawha  and  Thacker  districts 
were  less  than  $1  per  ton,  and  as  the 
executive  officers  had  determined  that  the 
minimum  advance  should  be  5  cents  per 
ton,  it  was  decided  to  advance  all  the 
rates  from  the  several  fields  of  origin  to 
the   several   Lake   Erie   ports   for   trans- 

102 


shipment  as  cargo  up  the  Great  Lakes  a 
straight  5  cents  per  ton,  thus  preserving" 
the  existing  regional  differentials. 

(2)  Line  Rates. 

In  the  all-rail  rates  to  the  West,  the 
Pittsburgh  district  rate  was  used  as  the 
basing  rate.  That  rate  was  advanced 
5  per  cent.,  the  regional  differentials  from 
the  other  districts  being  preserved.  In 
this  instance,  in  the  case  of  the  rate  to 
Chicago  and  some  other  western  places 
where  the  rates  all-rail  from  the  Ohio 
district  are  on  a  differential  of  25  cents 
per  ton  less  than  the  Pittsburgh  district 
rate,  the  advance  may  be  said  to  be 
slightly  more  than  5  per  cent. 

Anthracite  Coal  Rates 

Eastbound 

By  reason  of  the  fact  (1)  that  the 
existing  rates  on  Anthracite  coal  to  the 
East  are  already  the  subject  of  bitter 
attack  and  that  the  Interstate  Commerce 
Commission  is  about  to  proceed  with  an 
exhaustive  examination  into  the  rates, 
rules,  regulations  and  practices  of  the 
several  carriers  of  Anthracite  coal,  and 
(2)  that  the  small  sizes  of  Anthracite 
coal  must  practically  all  be  sold  in  the 
East  and  are  now  sold  at  a  loss  (that  is, 
at  less  than  the  cost  of  production)  in 
competition  with  Bituminous  coal,  no 
advance  therein  was  made. 

Westbound 

The  rates  on  Anthracite  coal  to  and 
beyond  the  western  termini  of  the  Trunk 
Lines  were  advanced  a  straight  5  per  cent. 
That  is  to  say,  the  rate  to  Buffalo  was 

103 


advanced  5  per  cent,  and  the  rates  pub- 
lished by  the  several  lines  operating  west- 
ward therefrom  were  also  advanced  5  per 
cent.,  as  were  likewise  the  all-rail  rates 
to  and  beyond  Pittsburgh,  published  by 
the  Pennsylvania  Railroad  Company  and 
its  connections;  the  rates  to  and  beyond 
Salamanca,  published  by  the  Erie  Rail- 
road Company  and  its  connections,  and 
the  rates  to  and  beyond  Pittsburgh,  pub- 
lished by  the  Philadelphia  and  Reading 
Railway  Company  in  connection  with  the 
Baltimore  and  Ohio  Railroad  Company, 
and  their  connections,  and  all  other  all- 
rail  rates,  with  the  exception  that  to  the 
several  Mississippi  River  crossings,  to 
which  there  are  joint  rates  established, 
•which  rates  are  based  on  certain  differ- 
entials over  and  above  the  Chicago  rate, 
those  differentials  were  preserved. 

CokelRates 

It  will  be  observed  from  the  foregoing 
that  in  every  instance,  with  the  exception 
of  the  rail  rates  to  Chicago  and  a  few 
other  western  places,  in  so  far  as  the  ad- 
vances in  the  Bituminous  and  Anthracite 
coal  rates  are  concerned,  the  basing  rate 
on  which  the  5  per  cent,  advance  was 
made  was  the  minimum  rate.  The  reason 
for  that  was  that  the  preponderant  pro- 
portion of  the  Bituminous  coal  tonnage 
moved  under  those  rates,  and  it  was 
realized  that  unless  the  minimum  rate 
was  used  as  the  basis  the  carriers  would 
receive  a  greater  return  than  5  per  cent. 

In  advancing  the  coke  rates  we  deviated 
from  this  practice  in  principle,  but  only 

104 


to  a  very  slight  degree  in  result.  By 
reason  of  the  fact  that  the  preponderant 
proportion  of  coke — probably  90  per  cent, 
or  more — consumed  throughout  the  East- 
ern and  Middle  States  is  produced  in  the 
Connellsville  region,  which  rate,  generally 
speaking,  is  the  maximum  rate,  it  was 
determined  but  fair  to  use  that  rate  as 
the  basing  rate,  and  therefore  the  rates 
on  coke  from  the  Connellsville  region 
eastbound,  northbound  and  westbound 
were  advanced  5  per  cent.  This  results 
in  a  greater  advance  than  5  per  cent,  in 
the  rates  from  the  Fairmont,  Latrobe  and 
Mountain  regions  eastbound,  but  as  the 
production  in  those  fields  is  exceedingly 
limited  as  compared  with  the  production 
in  the  Connellsville  field,  the  net  result 
is  that  the  advance  will  be  but  slightly 
more  than  5  per  cent. 

*     *     * 

The  sum  and  substance  of  the  entire 
matter  is  that  by  reason  of  using  the 
minimum  rate  as  the  basing  rate  in  every 
instance  in  advancing  the  coal  rates, 
except  in  the  case  before  referred  to,  the 
general  advance  published  in  the  tariffs 
already  filed  will  be  in  the  aggregate 
materially  less  than  5  per  cent. 

II. 

Coal  Rates  in  the  Middle  West 

The  statement  filed  with  the  Commis- 
sion covering  the  increase  of  coal  rates 
in  the  Middle  West  was  prepared  by  Mr. 
George  H.  Ingalls,  Freight  Traffic  Man- 
ager of  the  "Big  Four"  Railroad,  and  is 
as  follows: 

In  advancing  coal  rates  westbound,  the 

105 


Pittsburgh-Chicago  rate  was  taken  as  the 
base  rate,  and  the  rates  from  that  district 
were  advanced  5  per  cent,  to  all  points 
north  of  the  Ohio-Michigan  Line  and  to 
all  points  west  of  a  line  drawn  from 
Toledo  to  Cincinnati  on  the  C.  H.  and 
D.  Railway;  to  all  points  on  and  east  of 
that  line  they  were  advanced  5  cents  per 
ton.  The  rates  to  Chicago,  Peoria,  St. 
Louis  and  Cairo  were  advanced  10  cents 
per  ton,  as  well  as  the  proportional  rates 
to  the  Upper  Mississippi  River  Crossings 
and  Across-Lake — this  to  equalize,  via 
those  junctions,  the  rates  made  to  western 
points  on  the  Chicago  combinations. 

As  the  Ohio  rates  are  carried  on  a  dif- 
ferential under  the  Pittsburgh  rates,  the 
same  advance  was  made  in  the  rates  from 
the  Ohio  fields  to  the  territory  outlined 
above,  thus  maintaining  the  regional  dif- 
ferentials. 

Rates  on  coal  to  the  Lake  for  trans- 
shipment from  the  Pittsburgh  district 
were  advanced  5  cents  per  ton,  and,  in 
order  to  maintain  likewise  the  regional 
differentials,  the  rates  from  Ohio  fields 
to  Lake  for  trans-shipment  were  advanced 
5  cents  per  ton. 

The  coal  fields  in  Indiana  and  Illinois 
have  been  treated  as  one  coal  field — any 
change  in  rates  from  one  State  necessarily 
affecting  the  rates  from  the  other  State. 
Therefore,  it  has  been  the  practice  to  con- 
sider together  the  rates  on  coal  from  both 
States. 

There  are  in  existence  to-day  prac- 
tically ten  working  districts,  with  as  many 
rates,  and  in  order  to  maintain  the  present 

106 


regional  differentials,  the  rates  have  been 
advanced  uniformly  from  each  district 
5  cents  per  ton  to  Chicago  and  Chicago 
Rate  Points. 

The  rates  to  northern  Illinois  and 
southern  Wisconsin,  south  of  a  line  on  or 
south  of  the  C.  M.  and  St.  P.  Railway, 
Milwaukee  to  Madison,  via  Watertown, 
thence  via  C.  and  N.  W.  Railroad  to 
Dodgeville,  were  advanced  5  cents  per  ton 
from  each  district. 

Rates  to  northern  Illinois,  southern 
Wisconsin  and  some  points  in  Iowa  have 
been  advanced  5  cents  per  ton  from  each 
district.  The  rates  to  the  north  of  the 
above  outlined  territory  have  not  been 
advanced,  due  to  the  fact  that  these 
markets  are  competitive  with  eastern  coal 
handled  via  lake,  and  no  advance  having 
been  made  in  rates  from  the  head  of  the 
Lakes  to  this  territory,  it  was  felt 
equitable  to  maintain  the  present  basis  of 
rates. 

The  rates  from  Indiana  and  Illinois  to 
southern  Indiana  and  Illinois  points  have 
been  advanced  5  cents  per  ton  uniformly 
from  each  district. 

No  advance  has  been  made  to  points 
south  of  the  Ohio  River,  due  to  there 
being  no  corresponding  advances  from 
competitive  fields  in  Alabama. 

An  advance  of  5  cents  per  ton  has  been 
made  from  Indiana  and  Illinois  points  to 
all  central  and  northern  Indiana  points, 
thus  maintaining  the  regional  differen- 
tials. 

To  Michigan  points,  the  rates  from 
Indiana  and  Illinois  are  based  on  propor- 

107 


tional  rates  to  Chicago  junctions  in  con- 
nection with  specifics  into  Michigan. 

The  rates  from  the  Danville  group  to 
Michigan  territory  are  the  base  rates  and 
were  increased  5  per  cent.,  and  an  advance 
of  the  same  amount  per  ton  made  from 
other  Illinois-Indiana  districts,  thus 
maintaining  the  regional  differentials. 
Thi?  corresponds  to  the  5  per  cent,  ad- 
vance to  this  territory  that  has  been  made 
from  eastern  coal  fields. 

As  tariffs  from  Illinois  districts  serving 
St.  Louis  markets  were  filed  on  April  1, 
1913,  advancing  the  rates  on  coal  h1/* 
cents  per  ton  to  East  St.  Louis,  East  St. 
Louis  rate  points  and  St.  Louis  proper, 
and  the  same  having  been  suspended  by 
the  Interstate  Commerce  Commission 
and  being  now  in  the  course  of  investi- 
gation, no  further  advance  has  been  made 
in  those  rates.  The  proposed  advance 
would  maintain  the  present  regional  dif- 
ferentials. 

As  of  November  29th,  the  proportional 
rate  on  coal  destined  to  points  west  of  St. 
Tvouis  were  advanced  5  cents  per  ton, 
uniformly. 

Where  through  rates  are  made,  in  com- 
bination with  the  Iowa  distance  rates  on 
fine  coal,  the  rates  have  been  advanced 
5  cents  per  ton,  the  same  as  the  Upper 
Mississippi  Hiver  Crossings,  thus  main- 
taining the  regional  differentials. 


108 


The  Case  for  Increased  Railroad  Rates 


How  Railroad  Wages  Have 
Been  Increasing 

December  21,  1913. 

The  railroads  participating  in  the  ap- 
plication for  increasing  freight  rates  have 
filed  with  the  Interstate  Commerce  Com- 
mission statistics  showing  how  wages 
have  increased  on  these  roads  during  the 
past  several  years. 

The  various  railroad  companies  in  this 
territory  paid  out  $506,000,000  in  wages 
and  salaries  in  the  year  ending  June  30, 
1913.  Estimates  for  29  of  the  38  railroad 
systems  concerned  show  an  increase  in 
wages  for  1913  over  1910  of  $48,618,- 
972.41,  due  to  changes  in  rates  of  pay 
and  working  conditions. 

This  figure  was  obtained  as  a  result 
of  a  request  to  the  railroads  to  take  the 
actual  performance  for  the  year  ending 
June  30,  1913,  and  compare  the  rates 
of  pay  and  working  conditions  prevailing 
in  that  period  with  those  in  effect  in  Oc- 
tober, 1909,  a  period  prior  to  the  date"  of 
the  important  increases. 

In  addition  to  the  increases  up  to  June 
30,  1913,  careful  estimates  show  that  the 
increases  in  wages  recently  granted  to  the 
firemen,  conductors  and  trainmen  will 
add  not  less  than  $8,750,000  more  to  the 
expenses  of  the  railroads  parties  to  the 
respective  arbitration  proceedings,  this 
estimate  being  based  on  the  volume  of 
business  for  the  calendar  year  1912. 

In    addition    to    the    wage    increases 

granted  in  the  calendar  year  1910,  a  small 

portion  of  which  was  effective  in  the  fiscal 

year  ending  June  30,  1910,  the  Engineers, 

109 


Firemen,  Conductors  and  Trainmen  have 
been  awarded  increases  through  Arbitra- 
tion Proceedings  amounting  to  $10,350,- 
000  per  annum  on  the  Eastern  Rail- 
roads, and  increases  in  rates  of  pay  have 
been  granted  to  various  other  classes  of 
labor  amounting  to  large  sums  in  the  ag- 
gregate in  addition  to  those  granted  in 
the  year  1910. 

Taken  altogether,  there  has  been  an  in- 
crease of  10.62  per  cent,  in  the  average 
rates  of  pay  on  these  railroads  in  1913 

over  1910. 

*     *     *     * 

Figures  for  the  Pennsylvania  System 
show  that  during  the  year  1913  the  various 
companies  of  the  System  paid  in  wages  the 
sum  of  $189,397,069 — an  increase  for  the 
1913  payroll  of  $18,088,673  over  what 
would  have  been  paid  to  the  same  number 
of  employes  at  the  rate  of  wages  prevail- 
ing in  1909. 

Various  increases  and  adjustments  in 
wages  from  1901  up  to  June  30,  1913,  ap- 
plied to  the  1913  performance,  added  over 
$45,000,000  to  the  payrolls  of  the  Pennsyl- 
vania System  companies  by  reason  of 
changes  in  rates  of  pay  and  working  con- 
ditions. 

The  records  of  the  New  York  Central 
lines  show  that  wages  paid  since  1910 
have  amounted  to  $10,000,000  more  than 
would  have  been  the  case  had  not  the  suc- 
cessive increases  and  adjustments  been 
made. 

On  the  Baltimore  and  Ohio  Railroad 
the  increases  amounted  in  this  period  to 
$4,069,014. 

110 


The  Case  for  Increased  Railroad  Rates 


Attitude  of  the  Railroads  Con- 
cerning Questions  Sub- 
mitted by  the  Commission 

January  7,  1914 

On  December  26,  1913,  the  Interstate 
Commerce  Commission  addressed  to  the 
carriers  concerned  in  the  case  for  ad- 
vanced freight  rates  a  series  of  78  ques- 
tions relative  to  the  organization  and 
practices  of  the  railway  companies. 

On  January  7,  1914,  a  committee  rep- 
resenting the  carriers  appeared  before  the 
Commission,  and  the  general  attitude  of 
the  railroad  companies  concerning  these 
questions  was  set  forth  by  Mr.  Daniel 
Willard,  President  of  the  Baltimore  and 
Ohio  Railroad  Company,  at  the  opening 
of  the  hearing,  as  follows : 

"This  Commission,  in  its  circular  let- 
ter of  December  26,  1913,  addressed  to 
carriers  in  Official  Classification,  an- 
nounced that  it  would  on  January  7,  1914, 
hear  parties  concerning  any  matters  in 
connection  with  the  list  of  questions  there- 
with submitted,  and  as  to  which  further 
instructions  might  be  desired.  It  is  in 
response  to  that  invitation  that  the  car- 
riers interested  in  this  proceeding  appear 
here  to-day. 

"The  carriers  have  given  careful  con- 
sideration to  the  questions  referred  to, 
and  they  wish  to  announce  first  of  all  their 
entire  willingness  to  co-operate  as  com- 
pletely as  possible  with  the  Commission 
in  a  full  and  thorough  development  of  the 
whole  case,  and  to  that  end  will  endeavor 
to  furnish  any  and  all  information  which 

111 


may  be  desired,  but  inasmuch  as  the  Com- 
mission has  ordered  that  complete  answers 
to  all  of  the  78  questions  be  submitted 
not  later  than  January  31,  1914,  and  in 
view  of  the  fact  that  some  of  the  questions 
contemplate  a  review  of  complicated  trans- 
actions extending  over  a  period  of  fifteen 
years,  it  has  seemed  desirable  to  the  car- 
riers that  they  avail  themselves  of  the  op- 
portunity now  afforded  to  discuss  the 
matter. 

"The  Commission  states  in  its  letter  of 
inquiry  that  'elaborate  and  helpful  com- 
pilations from  the  carriers'  accounts  have 
been  submitted  by  the  railroads  with  a 
view  to  showing  the  diminishing  net  re- 
turns from  operations  and  lessened  net  in- 
come,' but  it  says  further  that  'these 
statements  of  the  financial  result  do  not 
furnish  fully  the  data  deemed  by  the  Com- 
mission to  be  necessary  to  determine  the 
general  course  carriers  may  pursue  to 
meet  the  situation'  and  that  additional 
data  is  desired  in  that  connection. 

"The  carriers  involved  have,  since  the 
inquiries  were  received,  made  as  thorough 
an  examination  as  possible  of  the  questions 
for  the  purpose  of  developing  the  infor- 
mation required  as  well  as  the  time  and 
expense  involved  in  furnishing  full  and 
complete  answers  thereto.  This  examina- 
tion indicates  that  it  will  be  impossible 
to  furnish  all  of  the  information  desired 
by  January  31st,  and  that  several  months 
will  be  required  in  which  to  prepare  some 
of  the  answers,  and  the  work  will  involve 
a  very  considerable  expense. 

"However,  for  the  purpose  of  develop- 

112 


ing  how  the  information  desired  may  be 
best  obtained,  and  at  the  same  time  with 
minimum  delay  and  expense,  the  carriers 
would  like  at  this  time  to  discuss  with 
the  Commission  some  of  the  more  difficult 
features  involved,  and  will  be  glad  to 
submit  suggestions  with  respect  thereto. 

"It  may  be  mentioned  in  this  connec- 
tion that  the  chief  executives  of  a  number 
of  the  more  important  lines  involved  in 
the  proceeding,  desire  to  appear  as  wit- 
nesses when  hearings  are  resumed,  and  it 
is  quite  possible  that  by  cross-examina- 
tion the  Commission  may  be  able  to  ob- 
tain from  such  witnesses  much  of  the 
additional  information  deemed  necessary 
to  enable  it  to  reach  a  determination  of 
the  matter  at  issue. 

"While  the  carriers  do  not  wish  to  ap- 
pear as  urging  improper  haste  concerning 
a  matter  of  such  great  importance,  they 
are  very  deeply  impressed  with  what  ap- 
pears to  them  to  be  the  seriousness  of  the 
situation,  and  they  hope  it  may  be  pos- 
sible to  proceed  with  the  hearing  without 
undue  delay. 

"They  believe  that  they  have  already 
demonstrated,  or  will  be  able  to  do  so,  a 
necessity  for  increased  revenue,  and  they 
feel  that  the  advance  proposed  by  the 
schedules  now  on  file  will,  if  granted,  only 
serve  to  partly  meet  the  necessary  require- 
ments of  the  situation.  In  suggesting, 
however,  that  the  situation  be  met  by  a 
uniform  advance  of  freight  rates  of  ap- 
proximately five  per  cent.,  the  carriers 
have  felt,  as  already  pointed  out,  that  that 
was  the  only  practicable  solution  available 
at  the  present  time." 

113 


The  Case  for  Increased  Railroad  Rates 


Results   of  Operations   in  the 
Central  West 

January  14,  1914. 

To  set  forth  the  needs  of  the  railroads 
in  the  Central  West,  in  the  application  for 
advanced  freight  rates,  Mr.  J.  L.  Minnis, 
attorney  for  the  Central  Freight  Associa- 
tion Lines,  has  just  filed  with  the  Inter- 
state Commerce  Commission  a  digest  of 
the  evidence  submitted  by  Mr.  W.  C.  Max- 
well, on  behalf  of  the  C.  F.  A.  Companies. 

Quotations  from  the  digest  prepared  by 
Mr.  Minnis  follow: 

"The  data,  therefore,  covers  a  total  mile- 
age of  34,866  miles,  arranged  in  groups. 

"Group  1  contains  the  mileage  of  38 
companies  aggregating  31,937  miles — 28,- 
186  miles,  or  78.6  per  cent,  of  the  total 
mileage  in  the  territory,  and  the  3,751 
'outside  mileage' — and  includes  all  the 
mileage  in  the  territory  except  13.8  per 
cent,  of  the  mileage  of  the  territory;  and 
except  also,  the  mileage  of  forty-six  short 
roads  owned  by  forty-six  companies,  ag- 
gregating 2,729  miles,  or  7.6  per  cent,  of 
the  total  mileage  in  the  territory,  whose 
aggregate  gross  revenue  for  the  year  1911 
was  less  than  eight  million  dollars. 

"  (a)  Prior  to  the  fiscal  year  1911  the  carriers 
were  free  to  promulgate  their  interstate  rates 
and  substantially  the  body  of  their  intrastate 
rates,  and  to  adjust  them  from  time  to  time 
to  ever-changing  conditions,  and  were,  in  a 
practical  sense,  unhampered  in  the  manage- 
ment of  their  properties. 

"(b)  The  ratio  of  operating  expenses  and 
taxes  to  operating  revenues  of  Central  Freight 
Association  territory  lines  reached  the  low  point 

114 


of  a  descending  period  in  1910,  and  began  to 
ascend  in  1911 — for  instance,  the  ratio  of  Group 
1  was: 

1908  75.11% 

1909  73.28 

1910  72.40 

1911  76.49 

1912  77.25 

1913  78.56 

"(c)  Beginning  with  the  year  1911,  the  power 
of  the  carriers  to  promulgate  their  interstate 
rates,  and  substantially  the  body  of  their  intra- 
state rates,  was  placed  under  the  supervision  of 
the  National  and  State  Governments,  so  they 
could  not  adjust  their  rates  to  the  increasing 
ratio  of  expenses  and  taxes  to  earnings;  and 
other  governmental  regulatory  laws  have  been 
enacted  affecting  the  management,  expenses 
and  revenues  of  the  carriers. 

Results  for  1910  and  1913 

"The  lines  of  Group  1  increased  their 
mileage,  1913  over  1910,  first  main  track 
owned  684  miles,  operated  828;  all  tracks 
owned  3,320  miles,  operated  3,568;  and 
increased  their  property  investment  $225,- 
503,220. 

"Operating  revenue,  1913  over  1910,  in- 
creased $71,398,933;  operating  expenses 
and  taxes  increased  $84,934,336;  operat- 
ing revenue,  after  deducting  operating  ex- 
penses and  taxes,  decreased  $13,535,403; 
or,  after  deducting  operating  expenses, 
taxes  and  rentals,  decreased  $13,893,910; 
or,  after  deducting  operating  expenses, 
taxes  and  hire  of  equipment,  decreased 
$15,133,257 ;  or,  after  deducting  operating 
expenses,  taxes,  rentals  and  hire  of  equip- 
ment, decreased  $15,491,764.  The  de- 
crease in  net  corporate  income  was  $23,- 
207,414. 

115 


"The  increase  in  operating  revenue,  $71,- 
398,933,  measures  an  additional  service 
rendered  the  public — increase,  1913  over 
1910,  in  tons  carried  one  mile,  approxi- 
mately ten  billion,  or  an  increase  of  16.43 
per  cent.;  and  in  passengers  carried  one 
mile,  four  hundred  million,  or  an  increase 
of  7.32  per  cent. 

"Notwithstanding  the  much  larger  vol- 
ume of  business  enjoyed  in  1913  over 
1910,  the  power  of  the  carriers  to  earn  a 
return  on  their  property,  declined  substan- 
tially. 

Results  in  Group  3 

"While  the  showing  of  Group  1  indicates 
that  the  carriers  as  a  whole  in  the  terri- 
tory are  rapidly  approaching  financial  dis- 
aster, it  is  believed  the  showing  of  that 
group  is  far  above  the  average  railroad 
situation  in  the  territory. 

"Group  3  embraces  28  companies  which 
operate  19,416  miles,  or  54.1  per  cent,  of 
the  entire  mileage  of  the  territory.  It  in- 
cludes all  the  mileage  in  the  territory  ex- 
cept that  of  the  'four  main  trunk  line 
connections,'  the  'coal  and  ore  roads/  the 
'forty-six  short  roads'  and  the  'excluded 
mileage'  (the  B.  &  0.  and  Erie,  C.  B.  & 
Q.,  etc.),  and  embraces  all  the  mileage 
which  serves  generally  the  people  of  the 
territory,  and  whose  prosperity  is  depend- 
ent upon  the  territory. 

"Obviously,  the  reasonable  needs  of  the 
lines  embraced  in  Group  3 — 54.1  per  cent, 
of  the  entire  mileage  of  the  territory,  to 
say  nothing  of  the  forty-six  short  roads — 
must  control  in  determining  the  reason- 
ableness of  rates  in  the  territory,  if  the 

116 


people  in  that  section  are  to  have  adequate 
transportation  facilities  and  prosper  meas- 
urably with  other  sections  of  the  country. 

"The  lines  in  Group  3  increased  their 
mileage,  1913  over  1910 — of  first  main 
track  owned,  543  miles;  operated,  604 
miles ;  of  all  track  owned,  2,020  miles ;  op- 
erated, 2,106  miles;  and  increased  their 
property  investment,  $99,570,844. 

"Operating  revenue,  1913  over  1910,  in- 
creased $33,025,190,  but  the  operating  ex- 
penses and  taxes  increased  $43,724,956, 
resulting  in  a  decrease  in  operating  reve- 
nue, after  expenses  and  taxes,  of  $10,699,- 
766;  or  a  decrease  in  operating  revenue, 
after  operating  expenses  and  taxes  and 
rentals,  of  $10,271,473;  or  a  decrease  in 
operating  revenue,  after  operating  ex- 
penses and  taxes  and  hire  of  equipment, 
of  $13,526,961 ;  or  a  decrease  in  operating 
revenue,  after  operating  expenses  and 
taxes,  rentals  and  hire  of  equipment,  of 
$13,098,668;  and  a  decrease  in  net  cor- 
porate income  of  $15,987,445. 

"The  increase  in  operating  revenue,  of 
$33,025,190,  measures  an  increase,  1913 
over  1910,  in  tons  carried  one  mile  of  four 
and  one-half  billion;  passengers  carried 
one  mile,  one  hundred  and  forty-five  mil- 
lion. 

"It  will  be  observed  that  after  swelling 
the  volume  of  business  by  this  increased 
traffic  and  increasing  the  property  invest- 
ment approximately  one  hundred  million 
dollars,  Group  3  had  remaining,  after  de- 
ducting operating  expenses  and  taxes, 
above  ten  million  dollars  less  money  than 
in  1910. 

117 


Dividends  Paid  in  1910  and  1913 

"Dividends  paid  by  the  lines  in  Group  3 
decreased,  1913  as  compared  with  1910, 
$5,943,035.  The  companies  paying  divi- 
dends in  1910  include  the  Grand  Rapids 
&  Indiana — which  has  not  paid  subsequent 
dividends — and  the  Chicago  &  Alton  and 
Toledo,  St.  Louis  &  Western — who  ceased 
paying  dividends  in  1913.  In  1911  four 
companies  reduced  their  dividends;  in 
1912  five  companies  reduced  their  divi- 
dends; and  in  1913  six  companies  reduced 
their  dividends.  > 

"Only  nine  companies  out  of  the  twenty- 
eight  in  Group  3  paid  dividends  in  1913." 


118 


The  Case  for  Increased  Railroad  Rates 


Situation  of  Eastern  Railroads 
in  March,  1914 

March  20,  1914. 

At  the  hearing  before  the  Interstate 
Commission  today,  Mr.  George  F.  Brow- 
nell,  vice-president  of  the  Erie  Railroad, 
in  requesting  that  the  commission  proceed 
immediately  to  hear  the  conclusion  of  the 
case  of  the  railroad,  made  the  following 
statement  to  the  commission : 

It  is  the  earnest  desire  of  the  carriers, 
as  it  has  been  their  desire  since  these  pro- 
ceedings were  instituted,  to  complete  the 
presentation  of  their  evidence  in  support 
of  the  advanced  rates  and  close  their 
case  at  the  earliest  possible  date,  in  order 
that  the  matter  may  be  submitted  for  the 
consideration  and  determination  of  the 
commission  without  any  avoidable  delay. 
The  petition  of  the  carriers  for  a  hearing 
of  the  commission's  determination  in  the 
1910  case,  as  to  the  necessity  for  addi- 
tional revenue  to  be  determined  through 
higher  freight  rates,  was  filed  in  May  of 
last  year. 

The  commission,  under  date  of  June 
21st,  denied  the  petition  for  rehearing, 
but  instituted  a  proceeding  of  inquiry 
(Docket  5860)  into  the  following  matters : 

1.  Do  the  present  rates  of  transporta- 
tion yield  adequate  revenue  to  carriers  by 
railroad  operating  in  official  classification 
territory  ? 

2.  If  not,  what  general  course  may  car- 
riers pursue  to  meet  the  situation  ? 

*     ♦     *     * 
In  its  report  upon  the  petition  for  a  re- 
hearing,    Commissioners     Clements    and 

119 


Marble  dissented  from  the  institution  of 
this  proceeding  of  inquiry  upon  the  ground 
that  it  should  not  be  made  in  advance  of 
the  filing  and  posting  of  the  proposed  in- 
creases. Commissioner  McChord,  while 
agreeing  to  the  general  proposition  stated 
by  Commissioners  Marble  and  Clements, 
was  of  the  opinion  that  the  investigation 
should'  be  made. 

In  these  circumstances  and  in  order, 
among  other  things,  to  meet  the  views  of 
the  commissioners  named,  the  carriers 
filed  their  tariffs  providing  for  a  general 
increase  on  the  basis  of  5  per  cent.,  with 
certain  minima  and  certain  modifications 
in  order  to  preserve  certain  necessary  dif- 
ferentials. These  tariffs  were  to  become 
effective  November  15,  1913,  but  were  sus- 
pended by  order  of  the  commission  No- 
vember 4,  1913,  by  which  order  the  com- 
mission also  instituted  this  hearing 
(Docket  No.  333)  concerning  the  pro- 
priety of  the  increases,  and  the  lawfulness 
of  the  increased  rates,  etc.,  stated  in  the 
tariffs  so  filed.  The  hearings  have  pro- 
ceeded together. 

The  first  hearing  was  on  November 
24th,  at  which  time  Messrs.  Willard  and 
Delano  made  opening  statements  for  the 
railroad  companies,  and  on  that  day  and 
two  succeeding  days  a  large  amount  of  evi- 
dence was  presented  by  accounting  officers 
of  the  carriers  and  other  witnesses.  The 
hearing  was  then  adjourned  for  the  pur- 
pose, among  others,  of  permitting  the  rep- 
resentatives of  the  commission  and  others 
to  examine  the  carriers'  exhibits  and  pre- 
pare for  the  cross-examination  of  the  ac- 

120 


counting  officers,  and  other  witnesses  who 
had  testified  on  behalf  of  the  carriers. 

The  commission  subsequently,  by  cir- 
cular letter  of  December  26th,  called  on 
the  carriers  to  prepare  and  submit  answers 
to  some  78  questions  propounded  by  the 
commission,  and  announced  that  on  Jan- 
uary 7th  it  would  hear  parties  concerning 
any  matters  in  connection  with  the  list  of 
questions,  as  to  which  further  instructions 
might  be  desired. 

On  January  7th  the  carriers  appeared 
before  Commissioner  Marble  and  an- 
nounced, through  Mr.  Willard,  their  en- 
tire willingness  to  co-operate  as  com- 
pletely as  possible  with  the  commission 
and  furnish  any  and  all  information  which 
might  be  desired.  They  pointed  out,  how- 
ever, that  it  would  take  at  least  several 
months  to  prepare  answers  to  those  ques- 
tions, and  that  the  work  would  involve  a 
very  considerable  expense.  At  that  time, 
and  in  that  connection,  Mr.  Willard  said : 

''While  the  carriers  do  not  wish  to  ap- 
pear as  urging  improper  haste  concerning 
a  matter  of  such  great  importance,  they 
are  very  deeply  impressed  with  what  ap- 
pears to  them  to  be  the  seriousness  of  the 
situation,  and  they  hope  it  may  be  possible 
to  proceed  with  the  hearing  without  undue 
delay. 

"They  believe  that  they  have  already 
demonstrated,  or  will  be  able  to  do  so,  a 
necessity  for  increased  revenue,  and  they 
believe  that  the  advance  proposed  by  the 
schedules  now  on  file  will,  if  granted,  only 
serve  to  partly  meet  the  necessary  re- 
quirements of  the  situation.     In  suggest- 

121 


ing,  however,  that  the  immediate  situation 
be  met  by  a  uniform  advance  of  freight 
rates  of  approximately  5  per  cent,  the  car- 
riers have  felt,  as  already  pointed  out, 
that  that  was  the  only  practicable  solution 
available  at  the  present  time." 

*     *     *     * 

Since  then  there  have  been  numerous 
hearings  with  respect  to  the  propriety  of 
the  carriers  making  additional  charges  for 
the  spotting  of  cars  on  industrial  tracks, 
lighterage,  reconsignments,  and  diver- 
sions in  transit,  and  other  services,  which 
are  now  performed  without  charge  in  ad- 
dition to  the  regular  tariff  rate;  also  a 
number  of  hearings  assigned  to  hear  testi- 
mony offered  by  protestants  against  in- 
creases with  respect  to  certain  commodi- 
ties. 

In  the  notice  from  the  commission  un- 
der date  of  the  24th  instant,  assigning 
hearings  for  the  30th  and  31st  instant,  it 
is  stated  that  the  carriers  have  expressed 
their  desire  to  present  at  an  early  date 
additional  testimony  touching  their  finan- 
cial requirements,  also  to  have  an  oppor- 
tunity to  offer  evidence  in  rebuttal  of  tes- 
timony recently  introduced  in  opposition 
to  the  proposed  increases  in  rates,  and 
that  March  30th  and  31st  were  assigned 
for  this  purpose,  and  for  hearing  Mr. 
Thorne,  and  that  if  the  carriers  were  not 
able  to  complete  their  testimony  at  the 
close  of  March  31st,  the  hearing  would  be 
continued  April  20th,  inasmuch  as  argu- 
ments had  been  set  for  the  intervening 
days.  The  carriers  will  not  be  able  to  com- 
plete the  presentation  of  their  case  in  one 

122 


day,  but  could  complete  it  in  three  days, 

and  they  respectfully  and  earnestly  urge 

that  the  commission  afford  two  additional 

days  this  week  to  enable  them  to  complete 

their  case. 

*     *     *     * 

Present  Earnings 

The  statement  of  the  revenues  and  ex- 
penses of  the  carriers  for  the  seven  months 
ending  January  31,  1914,  show  a  decrease 
of  operating  revenue  amounting  to 
$6,995,529,  and  a  decrease  in  operating  in- 
come of  over  $51,000,000,  as  compared 
with  the  seven  months  ended  January  31, 
1913,  being  a  decrease  in  operating  rev- 
enues of  1.5  per  cent. 

The  returns  of  the  roads  in  Central 
Freight  Association  territory  for  the  same 
period  (Group  1)  show  a  decrease  of 
$8,178,477  in  freight  revenue,  and  a  de- 
crease in  operating  income  of  $25,195,598. 
This  is  without  including  the  figures  of 
the  roads  in  Group  2  of  the  Central 
Freight  Association  roads,  which,  if  in- 
cluded, would  show  a  further  decreased 
operating  income  of  over  $4,000,000. 

The  returns  of  revenues  and  expenses 
for  February  and  March,  so  far  as  they  are 
now  available,  are  in  the  same  direction, 
and  are  of  such  significance  as  compared, 
even  with  the  returns  for  the  fiscal  year 
ended  June  30,  1913,  as  to  indicate  that 
the  condition  confronting  the  carriers  at 
the  present  time  is  one  of  gravity,  and 
that  it  is  of  vital  importance  in  the  inter- 
est of  the  public,  as  well  as  of  the  peti- 
tioning carriers,  that  the  question  of  the 
propriety  of  the  advanced  freight  rates  in- 

123 


volved  in  Docket  No.  333,  should  be  sub- 
mitted to  the  commission  for  their  deter- 
mination at  the  earliest  possible  day. 


We  desire,  therefore,  that  opportunity 
now  be  afforded  us  to  advise  the  commis- 
sion fully  with  respect  to  the  situation 
which  now  confronts  the  carriers  and  re- 
spectfully urge  that  the  commission  pro- 
ceed with  the  inquiry  as  to  the  adequacy 
of  freight  revenues  under  present  rates, 
and  into  the  reasonableness  of  the  ad- 
vanced rates,  without  further  deferring 
action  thereon  on  account  of  the  collateral 
inquiry  in  regard  to  the  practices  of  the 
carriers  involved  in  the  proceeding  of  in- 
vestigation, Docket  No.  5860,  but  that  the 
latter  be  considered  by  the  commission  in 
due  course. 


124 


The  Case  for  Increased  Railroad  Rates 


How  Railroad  Earnings 
Have  Decreased 

April  7,  1914. 

The  railroads  petitioning  for  a  5  per 
cent,  increase  in  freight  rates  have  filed 
with  the  Interstate  Commerce  Commis- 
sion figures  showing  the  results  of  opera- 
tions for  the  seven  months  ending  Janu- 
ary 31,  1914,  of  the  fiscal  year  beginning 
July  1,  1913. 

For  the  three  principal  systems,  namely, 
the  Pennsylvania,  Baltimore  and  Ohio 
and  New  York  Central,  returns  show  op- 
erating revenues  of  $458,472,676,  a  de- 
crease against  last  year  of  $1,294,375,  or 
0.3  per  cent.  Operating  expenses  in- 
creased $25,157,945,  and  operating  in- 
come decreased  $29,513,161,  or  24.8  per 
cent. 

The  forty  railroads  in  Central  Freight 
Association  territory  showed  revenues  of 
$316,584,427,  a  decrease  since  last  year  of 
$4,850,029,  or  1.5  per  cent.  By  reason  of 
the  great  increases  in  operating  expenses, 
the  operating  income  of  these  roads 
showed  a  decrease  of  $25,195,598,  or  30.7 
per  cent. 

The  Pennsylvania  Railroad  System 
with  operating  revenues  of  $223,693,157 
increased  over  last  year  $1,231,796,  while 
by  reason  of  increased  expenses  the  operat- 
ing income  decreased  $8,434,640,  or  15.9 
per  cent. 

The  Baltimore  and  Ohio  System  with 
operating  revenues  of  $59,950,125  showed 
a  decrease  of  $903,217  in  gross,  and  a  de- 
crease of  $2,227,429  in  operating  income, 
or  13.9  per  cent. 

125 


Operating  revenues  of  the  New  York 
Central  System  were  $174,829,394,  a  de- 
crease of  $1,622,954,  and  showing  a  de- 
crease in  operating  income  of  $18,851,092, 
or  37.8  per  cent. 

The  Erie  System  gross  operating  rev- 
enues decreased  $612,732,  to  a  total  of 
$37,630,081,  and  operating  income  de- 
creased $2,643,970,  or  24.8  per  cent. 

The  figures  for  the  forty-nine  roads  in 
the  entire  Official  Classification  territory 
showed  operating  revenues  of  $821,426,- 
031,  a  decrease  of  $6,995,529,  and  such  in- 
creases in  expenses  that  the  operating  in- 
come was  reduced  $51,026,935,  or  22.5  per 
cent. 


126 


The  Case  for  Increased  Railroad  Rates 


The  Present  Crisis  in  Railroad 
Conditions 

April  9,  1914. 

In  testifying  before  the  Interstate  Com- 
merce Commission  in  the  application  for 
an  advance  of  5  per  cent,  in  freight  rates, 
Mr.  Daniel  Willard,  president  of  the  Bal- 
timore and  Ohio  Bailroad,  when  asked  as 
to  whether  or  not  there  was  a  crisis  in  the 
business  situation  demanding  immediate 
relief,  replied: 

"I  suppose  I  had  better  define  first  what 
is  meant  by  a  crisis,  and  what  I  have  in 
mind  when  I  speak  of  a  crisis.  When  I 
speak  of  a  crisis,  what  I  have  in  mind  is  a 
condition  like  this: 

"If  it  has  come  about,  as  it  seems  to 
have  come  about,  that  new  money  to  pro- 
vide railroad  facilities  does  not  now,  un- 
der existing  conditions,  earn  any  return, 
then  it  would  seem  that  the  carriers  could 
not  be  expected  to  put  the  amount  of  new 
money  constantly  into  the  property  that  is 
necessary  in  order  to  take  care  of  the 
growing  commerce  which  they  are  called 
upon  to  move. 

"The  history  of  the  Baltimore  and 
Ohio,  for  instance,  shows  that  for  a  long 
period  of  years  it  has  been  necessary  to 
expend  from  $15,000,000  to  $20,000,000 
of  new  capital  upon  the  property  each  year 
for  new  equipment,  new  facilities,  new 
tracks,  and  things  that  are  necessary  to 
take  care  of  the  developing  country  which 
it  serves. 

"If  a  condition  should  come  about 
which  would  make  it  seem  unattractive 
or  unwise  to  the  Baltimore  and  Ohio  Kail- 

127 


road  Company  to  continue  to  put  that  new 
capital  into  the  property  to  provide  new 
facilities  and  take  proper  care  of  the  com- 
merce that  is  growing  all  the  time,  then  I 
should  say  there  had  come  about  a  condi- 
tion of  crisis  to  those  people  who  looked 
to  the  Baltimore  and  Ohio  Company  for 
transportation — just  such  a  condition,  for 
instance,  as  existed  in  1910. 

"I  have  already  referred  to  the  fact 
that  when  I  came  to  the  Baltimore  and 
Ohio  Eailroad  Company,  the  shippers 
complained  that  they  were  then  confronted 
with  a  very  serious  situation,  and  that  de- 
velopment in  part  of  West  Virginia  par- 
ticularly had  stopped.  To  my  mind  that 
would  be  one  indication  of  a  crisis  as  af- 
fects the  general  public. 

"There  might  be  another  phase  of  a 
crisis.  I  should  say  that  we  would  be  ap- 
proaching a  crisis  whenever  net  earnings 
as  a  result  of  our  operation  were  so  small 
that  our  ability  to  maintain  fair  returns 
upon  our  existing  capitalization  was  seri- 
ously in  question.  Those  who  hold  our  se- 
curities would  certainly  look  upon  that  as 
a  crisis  approaching,  for  it  would  certainly 
have  reference  to  their  investment. 

"I  should  also  think  that  it  might  be 
considered  there  was  a  crisis  at  hand  from 
the  point  of  view  of  the  workman,  when  a 
man  who  had  been  employed  by  a  com- 
pany for  some  time  was  deprived  of  em- 
ployment, not  because  his  services  were 
not  needed,  but  because  of  the  inability  of 
the  employer  to  pay  him.  I  should  think 
that  would  be  a  crisis  from  the  emplo}res' 
point  of  view. 

"As  I  view  the  situation,  all  of  these 
phases  are  at  hand  to-day,  in  a  state  of 

128 


greater  or  less  development,  and  I  have  re- 
ferred to  the  reasons  that  have  brought  it 
about  I  would  like  to  say  this  in  that 
connection  also: 

Not  Tendencies,  but  Facts— Now 

'Three  or  four  years  ago,  when  this 
matter  was  before  the  commission,  the  car- 
riers at  that  time,  as  I  recall,  based  their 
request  for  increased  rates  very  largely 
upon  what  they  considered  to  be  the  tend- 
encies of  that  time,  and  they  pointed  out 
that  while  at  that  particular  time  they 
were  able  to  meet  their  engagements,  as 
they  viewed  it,  the  tendencies  of  a  con- 
stant increase  in  wages,  increases  in  taxes, 
and  increases  in  other  directions,  brought 
about  by  various  other  forces,  the  tend- 
encies of  all  of  that  would  be  in  the  near 
future  to  bring  about  a  condition  where 
they  would  not  be  able  to  maintain  their 
fair  and  reasonable  payments  and  to  con- 
tinue to  provide  additional  facilities. 

"To-day  we  have  not  rested  our  case 
upon  the  matter  of  tendencies.  We  have 
stated — I  have  stated — and  I  most  ear- 
nestly believe,  it  is  not  a  question  of  tend- 
encies that  confronts  the  railroads  in  the 
eastern  territory  now.  It  is  a  question  of 
fact,  and  the  facts  either  are  or  are  not 
as  we  have  endeavored  to  point  out,  and 
in  the  case  of  the  Baltimore  and  Ohio,  I 
honestly  believe  them  to  be  as  I  have  en- 
deavored to  show.  It  is  not  a  question  of 
tendency  with  the  Baltimore  and  Ohio.  It 
is  a  question  of  an  exact  state  of  fact  at 
the  present  time." 

Mr.  Willard  stated  that  since  June  30, 
1910,  his  company  has  spent  about  $56,- 
000,000  in  improving  its  property.  The 
results  of  these  improvements  were  largely 

129 


available  for  the  traffic  of  1913.  In  1910 
the  company  earned  about  $90,000,000 
gross,  and  in  1913,  $103,000,000,  the  larg- 
est earnings  in  the  history  of  the  com- 
pany. But  by  reason  of  the  increased  ex- 
penses which  had  occurred  in  the  mean- 
time, their  net  earnings  in  1913  were 
$751,000  less  than  they  had  been  in  1910, 
before  the  additional  capital  had  been 
spent  for  the  additional  facilities  pro- 
vided. 


130 


The  Case  for  Increased  Railroad  Rates 


Increasing  Difficulties  of  the 
Railroads 

April  11,  1914. 
Mr.  F.  A.  Delano,  president  of  the  Chi- 
cago, Indianapolis  and  Louisville  Rail- 
way, commonly  termed  the  Monon  Route, 
in  presenting  to  the  Interstate  Commerce 
Commission  the  situation  in  Central 
Freight  Association  territory,  said  that 
the  commission  in  1910  "thought  the  rail- 
roads were  unduly  alarmed  at  what  they 
regarded  the  tendencies,  and  the  commis- 
sion pointed  out  that  times  were  improv- 
ing and  that  the  railroads  were  going  to 
fare  better,  apparently,  rather  than  worse. 
The  hopes  of  the  commission  do  not  seem 
to  have  materialized,  and  the  fears  ex- 
pressed by  the  railroads  have  come  true." 


With  reference  to  the  contention  that 
railway  credit,  judged  by  market  quota- 
tions on  railway  bonds,  was  improving, 
Mr.  Delano  stated  that  there  was  a  wide 
difference  between  what  might  be  known 
as  railroad  credit  and  what  might  be 
known  as  the  price  of  securities. 

"Now,  to  illustrate  that  point,  take  the 
case  of  the  Wabash.  If  anybody  should 
take  the  price  of  Wabash  first  mortgage  5 
per  cent,  bonds,  or  second  mortgage  5  per 
cent,  bonds,  for  the  period  from  1889  down 
to  date,  he  would  find  that  the  prices  had 
been  pretty  well  maintained.  Those  first 
mortgage  bonds  sold  all  the  way  down 
from  105  up  to  110.  There  has  been  very 
little  fluctuation.     The  prices  on  the  sec- 

131 


ond  mortgage  bonds  have  fluctuated  from 
98  to  102. 

"NoW,  that  has  no  bearing  at  all  on 
what  may  be  called  the  credit  of  the  rail- 
road company.  These  mortgages  were 
closed  mortgages  at  the  time  the  com- 
pany was  reorganized  in  1889.  There 
could  not  be  any  more  bonds  sold.  Any 
additions  to  property  had  to  be  made 
either  from  surplus  or  from  issuance  of 
car  trust  notes  or  from  the  sale  of  third 
or  fourth  mortgage  bonds — and  there  were 
such,  there  were  debenture  bonds  that 
were  equivalent  to  that — all  of  which 
went  to  increase  the  property  and  increase 
the  security  behind  these  same  first  and 
second  mortgage  bonds. 

"It  would  entirely  mislead  Mr.  Thorne 
or  any  other  investigator,  then,  to  simply 
consider  the  price  of  those  first  mortgage 
or  second  mortgage  bonds,  and  reach  a 
conclusion  from  that  as  to  the  credit  of  the 
Wabash.  The  credit  of  a  railroad  is  really 
what  it  can  raise  money  for  from  year  to 
year. 

"The  railroads  are  in  this  position. 
Their  senior  securities  have  practically  all 
been  marketed.  They  must  either  sell  a 
short  time  security  like  a  note,  a  car  trust 
note,  something  that  you  pay  off  the 
principal  in  instalments,  or  they  must  sell 
a  consolidated  mortgage  bond  or  a  con- 
vertible bond,  something  which  has  some 
speculative  feature  to  attract  the  buyer. 

"So,  the  vital  question  with  these 
railroads  is  their  credit  as  measured  by 
what  they  can  borrow  money  for.  The 
Wabash  Railroad  last  August,  in  the 
hands  of  a  receiver,  renewed  receivers'  cer- 
tificates on  the  basis  of  7%  per  cent.,  al- 

132 


though  those  receivers'  certificates  came  in 
ahead  of  $40,000,000  of  the  refunding 
bonds. 

The  Real  Measure  of 
Railroad  Credit 

"That  is  a  measure  of  the  credit  of  a 
railroad  rather  than  the  price  in  the  stock 
market    of    first    and    second    mortgage 

bonds." 

*  *     *     *      . 

Mr.  Delano  called  attention  to  the  fact 
that  the  average  gross  freight  rate  in  C.  F. 
A.  territory  was  not  only  less,  but  the  aver- 
age haul  was  less,  than  in  any  other  terri- 
tory in  the  country  except  one,  namely, 
Neve  England  ;  and  that  the  combination  of 
the  two,  that  is  the  rate  per  ton  mile,  on  the 
whole  is  very  much  less  in  C.  F.  A.  territory 
than  in  any  other  territory. 

*  *      *      * 

With  reference  to  maintenance  charges, 
Mr.  Delano  said: 

"In  the  last  nine  or  ten  years,  more  spe- 
cifically from  the  year  1905  down  to  date, 
I  found  on  the  Wabash  that  in  spite  of  a 
continuing  increase  in  gross  earnings, 
maintenance  increased  from  between  24 
to  25  per  cent,  of  gross  earnings  to  about 
29  to  30  per  cent.  That  was  under  pre- 
cisely the  same  management  through  all 
that  time,  with  precisely  the  same  policy, 
and  was  not  due  to  any  conscious  effort  to 
increase  maintenance  or  to  improve  the 
quality  of  the  road  more  than  was  abso- 
lutely demanded  by  the  public. 

"I  think  you  gentlemen  are  conscious 
that  there  has  been  a  very  steady,  irre- 
sistible demand  for  improved  conditions. 
Take  maintenance  of  way.  Sixty-five-  or 
75-pound  rails  were  once  considered 
ample.     To-day  there  are  very  few  main 

133 


lines  that  do  not  find  it  necessary  to  lay 
85-,  90-,  and  100-pound  rails. 

"To-day  we  have  to  use,  very  largely, 
soft  wood  ties  that  are  creosoted,  in  place 
of  hard  wood,  white  oak  ties,  which  we 
were  formerly  able  to  get.  The  great 
State  of  Indiana,  for  instance,  in  the  cen- 
ter of  C.  F.  A.  territory,  is  requiring  all 
railroads  to  adopt  automatic  block  signals 
and  public  safety  demands  it.  In  respect 
to  maintenance  of  equipment,  I  might 
point  out  to  you  that  70  per  cent,  of  main- 
tenance of  equipment  is  labor.  The  wages 
of  labor  in  our  shops  have  gone  up  very 
considerably  in  the  last  ten  years. 

"Just  as  Mr.  Willard  very  well  said, 
what  we  have  been  able  to  accomplish  in 
reducing  expenses  in  conducting  transpor- 
tation has  in  a  measure  been  reflected  by 
an  increase  in  expenses  in  maintenance. 
It  costs  more  to  maintain  these  big  en- 
gines than  it  did  smaller  ones.  It 
costs  more  to  maintain  big  cars  than 
smaller  cars.  Especially,  it  costs  more  to 
maintain  old  cars  handled  in  big  trains. 
It  costs  more  to  maintain  tracks  that  are 
operated  over  by  powerful  engines,  and 
switches,  side  tracks,  passing  tracks,  and 
all  items  of  that  kind  have  increased ;  and 
while  wages  of  track  labor  have  increased 
far  less  than  other  wages,  they  have  in- 
creased very  considerably  in  the  average. 


"Railroad  officials  generally  believe  that 
a  valuation  of  the  railroads  will  fully  jus- 
tify the  property  accounts;  but  they  also 
realize  that  until  that  valuation  is  com- 
pleted, they  may  be  attacked,  and  the  rail- 

134 


roads  have  no  answer  which  they  can 
make.  For  that  reason  the  C.  F.  A.  lines 
made  no  mention  in  their  presentations, 
and  did  not  urge  in  any  way  the  argument 
for  return  on  capital  invested.  Their 
whole  case  was  based  on  the  fact  that  since 
1907  new  capital  has  been  invested  in 
these  companies,  that  the  accounts  have 
been  kept  strictly  as  this  commission  re- 
quired them  to  be  kept,  and  with  that 
added  capital  invested  in  these  roads,  in 
most  cases  they  showed  less  return  than 
they  did  before  the  capital  was  invested. 

"We  simply  submitted  that  complete 
statement  as  evidence  that  we  could  not  on 
that  sort  of  a  showing  continue  to  get 
capital  to  improve  or  develop  these  rail- 
roads." 

*     *     *     * 

Mr.  Minnis :  "What  would  you  say  gen- 
erally of  railroads  in  C.  F.  A.  territory? 
Are  they  prosperous  or  otherwise  ?" 

Mr.  Delano:  "They  are  certainly  not 
prosperous.  In  the  group  of  railroads 
known  as  Group  3,  in  my  opening  state- 
ment it  shows  that  of  the  28  lines,  9  of 
them  paid  a  dividend  in  the  year  1913. 
The  other  19  did  not.  Quite  a  number  of 
the  19  were  in  the  hands  of  receivers." 


135 


The  Case  for  Increased  Railroad  Rates 


Obstacles  to  Raising  New 
Railroad  Capital 

April  13,  1914. 

Mr.  W.  H.  Williams,  third  vice-presi- 
dent of  the  Delaware  and  Hudson  Com- 
pany, in  the  5  per  cent,  advance  rate  case 
has  presented  a  statement  to  the  Interstate 
Commerce  Commission  concerning  the  de- 
cline in  railway  credit  and  the  increased 
competition,  especially  by  municipalities 
and  public  utilities,  for  the  world's  avail- 
able capital. 

The  substance  of  Mr.  "Williams'  paper  is 

as  follows: 

*     *     *     * 

Based  on  the  yearly  averages,  the  rail- 
roads are  now  compelled  to  pay  more  for 
their  capital  than  at  any  time  within  the 
eleven  years.  The  railroads  are  between 
upper  and  nether  millstones.  They  are 
not  only  compelled  to  raise  the  net  in- 
terest rate  on  their  new  offerings  in  order 
to  withstand  the  higher  rates  offered  by 
municipalities,  but  they  must  also  contend 
in  the  investment  market  with  the  increas- 
ing amount  of  new  standard  public  utility 
and  industrial  offerings. 

Thus,  on  the  one  hand  the  railroads 
have  to  meet  the  competition  of  an  in- 
creasing amount  of  securities  of  the  very 
highest  character  as  regards  safety,  i.  e., 
municipal  borrowings;  on  the  other  hand, 
they  have  to  compete  with  the  high  rates 
of  return  offered  by  the  so-called  public 
utility  and  industrial  securities. 

Eailroad  securities  have  lost  a  great 
deal  of  the  strength  of  their  former  posi- 
tion as  the  most  popular  class  of  invest- 

136 


ment  securities,  occupying  a  place  between 
government  obligations  (selling  at  a  very 
low  income  yield),  and  public  utility  or 
industrial  securities  (offering  a  high  in- 
come yield,  but  considered  less  desirable 
for  conservative  investment).  This  has 
contributed  to  (a)  the  pronounced  fall  in 
the  prices  of  outstanding  standard  rail- 
road securities,  and  (b)  greater  difficulty 
in  procuring  new  railroad  capital. 

Investment  Merits  of 
Railroad  Securities 

The  ability  of  the  railroads  to  raise  new 
capital  has  been  impaired  to  a  considerable 
extent  by  the  following: 

1.  The  inability  of  many  railroads  to 
issue  further  prior  lien  obligations  as  the 
mortgages  on  their  existing  lines  and 
other  property  have  become  closed. 

2.  The  decrease  of  net  earnings  due  in 
part  to  decreases  in  rates  and  in  part  to 
higher  operating  costs. 

3.  Inability  to  obtain  any  increased  re- 
turn after  increasing  total  investment. 

4.  Legal  restrictions  on  railroad  securi- 
ties as  investments  for  savings  banks,  trust 
funds  and  insurance  companies. 

5.  Discrimination  against  railroad  se- 
curities in  the  matter  of  exemption  from 
taxation  as  contrasted  with  State  and  mu- 
nicipal bonds. 

6.  Risk  attending  railroad  enterprises. 
Owing  to  the  rigidity  of  rates  and  the 

inability  to  adjust  their  charges  to  con- 
form with  changes  in  business  or  in  oper- 
ating conditions,  railroads,  in  this  respect, 
are  at  a  peculiar  disadvantage  as  com- 
pared with  manufacturing  concerns.  Al- 
though railroads  cannot  expand  earning 
capacity  as  industrial  companies  do,  they 

137 


are,  nevertheless,  affected  by  business  de- 
pressions. 

The  property  investment  of  the  railroads 
is  increasing  at  a  greater  ratio  than  net 
operating  income.  Thus,  the  increase  in 
the  capital  investment  as  of  June  30,  1913, 
over  June  30,  1910,  of  thirty-eight  Eastern 
Railroads  was  $659,862,586, or  11.74  percent., 
whereas  net  operating  income  actually 
decreased  $16,311,321,  or  4.62  per  cent. 

This  condition  is  undoubtedly  due  in 
large  part  to  the  non-productive  nature  of 
much  of  railroad  capital.  Improvements 
such  as  the  elimination  of  grades,  eleva- 
tion of  tracks,  electrification  of  terminals 
and  the  like,  entail  large  capital  expendi- 
tures without  corresponding  net  return. 


Nothing  Earned  on  New  Capital 

In  recent  years,  notwithstanding  large 
increases  in  gross  receipts,  increases  in  ex- 
penses and  in  taxes  have  been  so  great  as 
to  more  than  offset  the  additional  receipts, 
so  that  for  the  new  money  which  the  in- 
vestor has  put  into  the  railroads  there  has 
been  little  or  nothing  earned. 

It  should  be  noted  that  in  1913  the 
savings  banks  of  the  United  States,  re- 
porting to  the  comptroller  of  the  currency, 
owned  about  $821,500,000  of  the  railroad 
bonds  against  about  $708,000,000  held  by 
all  other  banks,  trust  companies,  etc. 
These  figures  serve  to  suggest  the  serious 
effect  upon  these  important  agencies  for 
the  encouragement  of  thrift,  and  the  irrep- 
arable damage  to  their  depositors  that 
would  follow  further  depreciation  of  rail- 
way securities. 

138 


The  failure  to  earn  any  return  on  new 
capital  tends  to  produce  a  condition  in 
which  the  payment  of  dividends  would  be 
impossible.  Further,  it  should  be  noted 
that  a  number  of  companies  whose  bonds 
are  already  in  the  savings  bank  class  are 
not  able  to  obtain  new  capital  by  the  issue 
of  stock. 

It  is,  therefore,  essential  that  railroad 
earnings  shall  be  large  enough  to  place 
the  companies  in  a  financial  position  that 
will  enable  them  to  obtain  necessary  new 
capital  by  the  issue  of  shares  of  stock  and, 
at  least,  to  maintain  the  position  of  the 
existing  issues  of  bonds  that  are  now  avail- 
able for  savings  bank  investment. 

Notwithstanding  the  large  capital  ex- 
penditures made  by  the  railroads  during 
the  past  six  or  seven  years,  the  economies 
and  increased  traffic  resulting  therefrom 
have  not  been  sufficient  to  offset  the  in- 
creased cost  of  wages,  materials,  supplies 
and  taxes,  so  that  with  a  substantial  in- 
crease in  their  fixed  charges  the  railroads 
have  had  a  less  amount  available  with 
which  to  meet  such  charges. 


Railroads  Need  $600,000,000 
New  Capital  Per  Year 

If  the  railroads  are  to  secure  sufficient 
funds,  their  credit  must  be  improved  and 
this  can  only  be  accomplished  by  larger 
excess  of  current  earnings  over  the  current 
cost  of  operation  and  taxes.  Increased 
capital  cannot  be  invited  in  any  other  way. 
The  railroads  of  the  United  States  invest 
annually  about  $600,000,000. 

The  bulk  of  this  new  capital  must  be 
obtained  from  private  investors.     These, 

139 


naturally,  place  their  funds  where  the 
prospects  for  fair  returns  are  reasonably 
assured.  They  will  put  their  money  into 
railroads,  therefore,  only  when  the  invest- 
ment returns  in  railroad  properties  are  as 
good  and  as  well  secured  as  in  other  enter- 
prises. 

This  competition  of  outside  securities  is 
an  element  in  the  cost  of  capital  to  the 
railroads.  It  must  be  successfully  met  if 
transportation  systems  are  to  continue  de- 
veloping and  expanding. 


140 


The  Case  for  Increased  Railroad  Rates 


Higher  Cost  of  Railroad 
Living 

April  14,  1914. 
Testifying  before  the  Interstate  Com- 
merce Commission  in  the  5  per  cent,  ad- 
vanced rates  case,  Mr.  YV.  (\  Wishart, 
statistician  of  the  New  York  Central  Rail- 
road, spoke  in  substance  as  follows  con- 
cerning "A  Railroad's  Cost  of  Living": 


TJates  of  pay  for  transportation  have 
gone  down  sharply.  The  consumer  of  to- 
day can  secure  more  transportation  for  a 
given  amount  of  goods  than  he  ever  could 
before,  and  the  carrier  continues  to  sell  at 
declining  prices  regardless  of  cost  of  pro- 
duction. While  revenues  per  unit  of 
traffic  have  remained  fairly  constant,  as 
measured  in  money,  the  railroad  has  suf- 
fered a  heavy  decline  in  actual  compen- 
sation for  its  services,  on  account  of  the 
decreasing  purchasing  power  of  the  dollar. 

Though  it  has  been  necessary  time  and 
again  to  raise  the  scale  of  wages  to  meet 
the  demands  of  employes  and  to  procure 
the  necessary  labor,  the  railroad  must  still 
accept  for  its  services  an  average  rate 
which  is  very  much  depreciated  in  ex- 
change value  from  that  which  it  had  when 
the  present  rate  level  was  established. 

While  transportation  revenues  per  unit 
of  traffic  appear,  since  1902,  to  have  re- 
mained fairly  constant,  in  that  they  are 
expressed  in  approximately  the  same  fig- 
ures year  after  year,  influences  beyond  the 
control  of  any  group  of  men  have  been  at 
work  quietly  and  constantly  to  reduce  the 

141 


actual  compensation  to  the  carrier  to  a 
level  which  is  estimated  as  almost  10  per 
cent,  below  that  of  1896. 

The  ability  of  a  railroad  to  purchase 
labor,  supplies  and  credit  has  been  im- 
paired by  the  general  increase  in  commod- 
ity prices  in  the  face  of  a  fixed  rate  of  re- 
turn per  unit  of  service,  for  it  may  be 
shown  that  the  cost  of  labor,  supplies  and 
capital  increase  as  the  general  price  level 
rises. 

$       $       $       $ 

While  average  revenues  have  declined 
somewhat,  wages  have  risen  24  per  cent, 
per  unit  of  traffic,  and  other  expenses  and 
taxes  about  12  per  cent,  per  unit  of  traffic, 
but  it  has  been  possible  to  do  a  larger  busi- 
ness per  dollar  of  plant  investment. 


F^ailroad  Doubly  Penalized 

A  railroad  which  cannot  adjust  its  rates 
to  meet  rising  costs,  and  thereby  suffers  a 
loss  in  relative  net  earnings,  is  doubly 
penalized.  First,  it  must  pay  more  on  ac- 
count of  the  general  rise  in  interest  or  rent 
for  the  use  of  capital ;  and,  second,  it  must 
suffer  through  its  inability  to  offer  as  good 
security  as  formerly  or  to  maintain  a  mar- 
gin of  profit  great  enough  to  offset  the 
change  in  the  character  of  the  security  of- 
fered. Both  factors  increase  the  cost  of 
production  and  in  most  enterprises  are 
met  by  an  increase  in  the  selling  price  of 
the  product. 

The  present  difficulty  of  the  railroad, 
however,  arises  more  largely  out  of  the  in- 
creased cost  of  operation  and  taxes,  the 
current  expenses,  which  have  kept  pace 
with  the  rise  in  commodity  prices  and 
have  advanced  faster  than  gross  revenues 

142 


or  traffic.  The  increasing  cost'  of  plant 
and  higher  fixed  charges  make  themselves 
felt  more  slowly,  but  are  none  the  less 
serious. 

If  the  service  of  transportation  were 
paid  for  in  kind,  that  is,  by  taking  toll  of 
the  commodities  carried,  and  the  standard 
toll  to-day  were  the  same  as  that  to  which 
it  had  been  reduced  after  the  period  of 
competition  spoken  of  by  Commissioner 
Prouty,  the  well-managed  railroads  would 
be  prosperous  and  the  impairment  of 
credit  which  they  are  now  experiencing 
would  have  no  reason  for  existence. 

A-  it  is,  there  has  been  a  marked  in- 
crease in  business  done  with  a  steadv 
shrinkage  in  the  measure  by  which  the 
carrier's  toll  is  meted  out.  The  result  is 
that  the  railroad  apparently  has  passed 
the  point  where  it  is  possible  through  an 
increase  in  the  volume  of  its  business  to 
obtain  a  living  from  the  decreasing  toll 
and  now  finds  itself  in  a  predicament  not 
of  its  own  making. 

Real  Rates  Greatly  Declined 

If  there  had  been  the  same  growth  in 
traffic,  with  a  practically  stable  medium  of 
exchange,  as  there  has  been  during  the 
past  fifteen  years  with  money  constantly 
depreciating  in  exchange  value,  the  rail- 
roads would  have  no  just  cause  for  com- 
plaint. 

Furthermore,  the  relation  between  the 
railroads  and  their  patrons,  their  em- 
ployes, and  their  stockholders  probably 
would  lie  more  satisfactory  than  they  arc. 
While  the  service  has  been  greatly  im- 
proved, it  has  not  been  possible  to  make  it 
what  the  managers  would  like. 

143 


While  wages  have  risen  as  a  result  of 
arbitration,  mediation  and  the  general  de- 
mand for  higher  pay  in  all  branches  of  in- 
dustry, stockholders  have  not  received  rel- 
atively as  high  a  return  as  they  did  in  the 
late  90s. 

The  percentages  may  be  the  same,  but 
the  purchasing  power  of  the  dividend  is 
considerably  lowered,  and  if  one  attempted 
to-day  to  realize  upon  the  investment,  he 
would  receive  not  only  fewer  dollars,  but 
considerably  less  in  what  they  will  buy. 


144 


LLETIN    NO.   24 


The  Case  for  Increased  Railroad  Rates 


Why  It  Costs  More  to  Keep 

Up  a  Railroad's  Cars  and 

Locomotives 

April  15,  1914. 

At  the  hearing  before  the  Interstate 
Commerce  Commision,  Mr.  J.  T.  Wallis, 
general  superintendent  of  motive  power 
of  the  Pennsylvania  Railroad  Company, 
testified  concerning  the  increased  mainte- 
nance of  equipment  expenses  incidental  to 
the  operation  of  the  Pennsylvania  Rail- 
road System. 

Mr.  Wallis  pointed  out  that  the  Penn- 
sylvania System  paid  out  $72,971,585  for 
maintenance  of  equipment  in  1913  as 
compared  with  $58,197,036  in  1910— an 
increase  of  25.39  per  cent. 


The  Pennsylvania  Railroad  east  of 
Pittsburgh  had  4242  locomotives  on  June 
30,  1913,  against  4067  on  June  30,  1910. 
Average  tractive  power  in  1913  was  32,- 
776  pounds  against  31,013  pounds  in  1910. 
Total  locomotive  miles  were  128,334,119 
in  1913  and  117,010,549  in  1910. 

The  cost  of  locomotive  repairs  on  the 
Pennsylvania  Railroad  lines  east  of  Pitts- 
burgh for  the  year  ended  June  30,  1910, 
was  $11,597,406.  The  cost  of  locomotive 
repairs  for  the  year  ended  June  30,  1913, 
was  $15,267,832,  an  increase  of  $3,670,- 
426,  or  31.7  per  cent. 

It  costs  proportionately  more  money  to 
maintain  a  large  locomotive  than  a  small 
one,  and  the  repairs  of  any  given  size  loco- 
motive will  vary  with  the  number  of  miles 
that  the  locomotive  is  run,  namely,  its  use. 

145 


It  is  accordingly  proper  to  base  compari- 
son of  the  cost  of  locomotive  repairs  on 
tractive  power  miles,  which  are  arrived  at 
by  multiplying  the  mileage  of  every  loco- 
motive in  service  by  its  tractive  power. 

Of  the  total  increase  of  $3,670,426  in 
locomotive  repairs,  $1,129,940  is  ac- 
counted for  by  increased  rates  of  pay  and 
by  expenditures  to  meet  changed  condi- 
tions, and  $1,843,988  as  a  result  of  in- 
crease in  tractive  power  miles. 

The  cost  of  locomotive  repairs  to-day 
bears  a  proper  relation  to  the  class  of  loco- 
motives that  are  being  maintained  when 
due  consideration  has  been  given  to  the 
general  increases  and  various  adjustments 
in  wages  that  have  been  made  since  the 
adoption  of  locomotives  of  the  type  used 
to-day. 

Repairs  of  freight  cars  cost  the  Pennsyl- 
vania System  $24,121,049  in  1913  as  com- 
pared with  $18,281,364  in  1910.  There 
were  268,364  cars  the  former  year  against 
249,788  in  1910. 

Of  the  total  sum  of  $5,839,685  increased 
charges  to  repairs  of  freight  cars,  there  is 
due  to  an  increase  in  total  freight  car 
mileage  $2,175,482.  The  increase  in 
wages  previously  referred  to  in  connection 
with  locomotives  caused  an  increase  of 
$572,802.  Expenditures  rendered  neces- 
sary by  the  standardization  of  equipment 
law  accounted  for  a  further  sum  of  $1,- 
190,054. 

The  remaining  amount  of  $1,901,347  is 
due,  first,  to  an  increase  in  the  price  of 
yellow  pine  and  oak  used  in  repairs  of 
wooden  cars,  and,  second,  to  the  increase 
in  the  capacity  of  the  modern  car. 

146 


Why  Repairs  Cost  More 

The  character  of  the  cars  that  are  being 
constructed  to-day  is  different  from  what 
it  was  ten  years  ago.  Steel  cars  are  com- 
ing in  for  heavy  repairs,  and  the  situation 
is  gradually  adjusting  itself,  but  we  will 
not  have  complete  data  as  to  the  cost  of  re- 
pairs to  such  cars  until  a  greater  propor- 
tion of  the  steel  cars  have  been  passed 
through  the  shop  for  heavy  repairs,  and 
probably  not  until  some  of  them,  at  least, 
have  been  discarded  on  account  of  decay, 
at  which  time  an  average  figure  for  the  re- 
pair of  steel  cars  can  be  arrived  at,  but 
this  is  not  possible  to-day. 

The  cost  of  repairs  to  freight  cars  per 
million  capacity  ton  miles  has  decreased 
each  year  as  compared  with  the  year  1903, 
this  decrease  for  1909  being  22.6  per  cent. 
Since  that  time  the  decrease  has  not  been 
so  great,  due  to  the  fact  that  there  was  an 
increase  in  wages  and  added  expenditure 
in  connection  with  the  standardization  of 
equipment  law.  In  the  year  1913  there 
was  a  decrease  of  17.4  per  cent,  in  the  cost 
of  repairs  per  million  capacity  ton  miles 
under  the  cost  of  1903.  If  the  charges 
for  the  standardization  of  equipment  law 
and  the  increase  in  wages  were  eliminated, 
the  cost  per  million  carrying  capacity 
miles  would  have  been  .00069  as  compared 
with  .00093  in  1903,  or  a  decrease  of  26 
per  cent.  In  other  words,  it  is  quite  plain 
that  the  cost  of  car  repairs  per  unit  of  ca- 
pacity available  for  loading  is  decreasing, 
if  other  varying  factors,  such  as  increases 
in  wages  and  charges  for  standardization 
of  equipment,  are  eliminated. 

The  cost  of  repairs  to  passenger  equip- 
ment cars  for  the  year  ended  June  30, 

147 


1910,  was  $2,681,753,  and  for  the  year 
ended  June  30,  1913,  $3,176„707,  an  in- 
crease of  $194,954,  or  18.4  per  cent. 

Of  this,  6.6  per  cent.,  or  $176,006,  is 
due  to  an  increase  in  car  mileage.  An  in- 
crease in  wages  heretofore  referred  to  ac- 
counts for  an  additional  amount  of  $75,- 
781,  or  2.8  per  cent. 

In  1908  we  received  our  first  steel  pas- 
senger equipment  cars.  At  January  1, 
1914,  we  had  a  total  of  1742  steel  passen- 
ger cars  in  steam  service,  84  steel  cars  in 
electric  service,  and  2209  wooden  cars. 
The  wooden  cars  have  been  rapidly  go- 
ing out  of  service  and  the  steel  cars  have 
been  replacing  them.  The  rate  of  replace- 
ment has  been  very  rapid,  in  fact,  much 
faster  than  the  replacement  of  wooden  cars 
prior  to  the  adoption  of  the  steel  car.  Dur- 
ing the  first  few  years  that  the  steel  cars 
came  to  us,  they  required  comparatively 
little  attention,  and  in  our  effort  to  utilize 
our  steel  passenger  equipment  cars  to  the 
very  best  advantage  and  to  make  steel  cars 
cover  a  maximum  number  of  trains  so  that 
the  public  might  have  the  maximum  ben- 
efit therefrom,  we  kept  our  steel  passenger 
equipment  cars  out  of  the  shop  and  did 
but  comparatively  little  work  on  them 
until  within  the  last  two  years,  when  it  be- 
came necessary  to  take  them  in  and  do 
more  work  to  prevent  deterioration. 

Renewals  and  Depreciation 
of  Equipment 

At  the  present  time  the  Pennsylvania 
Railroad  Company  charges  depreciation  on 
the  following  bases :  Locomotives  and  pas- 
senger cars  on  a  basis  of  4  per  cent,  of 
the  original  cost  of  the  equipment,  and  on 
freight  cars  on  a  basis  of  3  per  cent,  on 

148 


such  cost,  for  the  reason  that  we  believe  a 
locomotive  will  last  about  twenty  years, 
and  based  on  the  final  value  of  the  scrap 
being  20  per  cent,  of  the  original  value, 
the  depreciation  plus  the  salvage  will  equal 
the  original  cost.  On  passenger  cars  we 
believe  that  our  wooden  cars  will  last 
twenty  years.  As  far  as  steel  cars  are  con- 
cerned, we  do  not  know  how  long  they  will 
last,  but  in  order  to  provide  for  the  re- 
placing of  our  wooden  with  steel  cars  in  a 
reasonable  time,  and  for  the  steel  cars 
when  they  shall  have  to  be  retired,  the  best 
figure  we  have  been  able  to  arrive  at  is  4 
per  cent. 


149 


The  Case  for  Increased  Railroad  Rates 


Why  It  Costs  More  to  Maintain 
a  Railroad 

April  16, 1914. 

Testifying  in  the  5  per  cent,  rate  case 
before  the  Interstate  Commerce  Commis- 
sion, Mr.  J.  G.  Rodgers,  General  Superin- 
tendent of  the  Northern  Division  of  the 
Pennsylvania  Railroad,  set  forth  the  rea- 
sons for  the  increase  in  cost  of  mainte- 
nance of  way  and  structures  on  the  Penn- 
sylvania Railroad  in  recent  years. 
*     *     *     * 

Charges  to  operating  expenses  on  the 
Pennsylvania  System  east  of  Pittsburgh 
were  $24,855,624  in  1910  and  $29,411,210 
in  1913 — an  increase  of  18.3  per  cent. 
Mr.  Rodgers  stated  in  substance: 

The  maintenance  of  way  expenses  for 
1913  are  necessarily  much  larger  than 
they  have  been  in  the  past  and  will  un- 
doubtedly continue  to  be  at  least  on  the 
present  level  in  the  future,  due  to  the  fol- 
lowing causes :    ' 

1.  The  large  increase  in  wages  which 
has  already  been  made. 

2.  That  in  view  of  the  policy  of  com- 
missions and  the  demands  of  the  public,  a 
much  higher  standard  of  maintenance 
must  be  observed  than  in  the  past. 

3.  That  in  past  years  the  standard,  qual- 
ity, durability  and  strength  of  the  road- 
bed and  track  structure  has  not  kept  pace 
with  the  increase  in  the  weight  of  locomo- 
tives and  steel  cars,  but  the  improvements 
that  have  been  made  looking  toward  this 
end  have  made  the  track  a  much  larger 
and  more  expensive  structure  than  it  was 

150 


some  years  ago  and,  therefore,  it  costs 
more  to  renew  the  different  parts  thereof. 
4.  That  the  policy  of  eliminating  grade 
crossings,  installing  interlocking  and  auto- 
matic signals,  straightening  line,  etc.,  in 
which  respect  there  is  still  a  great  deal  to 
be  done,  and  which  will  continue  as  far 
into  the  future  as  we  can  foresee,  involves 
heavy  charges  for  replacement  in  kind  of 
plant  retired,  and  the  structures  which  are 
built  to  eliminate  grade  crossings,  con- 
sisting as  they  do  of  embankments,  tun- 
nels and  bridges,  will  require  much  more 
to  be  spent  upon  them  in  the  way  of 
maintenance  than  the  ordinary  running 
track  that  heretofore  existed. 
*     *     *     * 

Thus,  of  the  total  increase  in  mainte- 
nance of  way  and  structures  expenditures, 
1913  over  1910,  of  $4,555,586  there  are 
accounted  for :  • 

1.  Mileage  maintained $1,089,059 

2.  Rate  of  wages  paid 633,760 

3.  Number  of  men  employed.        283,721 

4.  Prices  of  materials  used  . .        607,603 

5.  Miscellaneous  repair  items.  7,624 

6.  Amounts  charged  to  ex- 
penses as  replacements  in 
kind  in  connection  with 
elimination  of  grade  cross- 
ings, installation  of  inter- 
locking and  automatic  sig- 
nals, changes  of  grade  and 

line,  etc ' 2,162,964 


Total $4,784,731 

*     *     *     * 

Increasing  Costs 

Mr.  Eodgers  gave  certain  concrete  illus- 
trations of  increased  costs,  as  follows : 

151 


The  average  distributing  point  price  of 
rail  has  advanced  from  $28.87  in  1910  to 
$30.88  in  1913,  an  increase  of  $2.01  per 
ton,  or  7  per  cent.,  due  to  a  greater  pro- 
portion of  open-hearth  than  Bessemer  steel 
used  to  secure  increased  safety  during  the 
latter  year. 

The  average  price  of  all  ties  used  for 
repairs  increased  from  76.6c.  to  84.5c.  at 
the  distributing  point.  This  is  due 
largely  to  the  increased  use  of  creosoted 
soft-wood  ties  made  necessary  by  the 
scarcity  of  hard-wood  ties.  Creosoted  ties 
have  been  used  since  1909  only;  in  1910, 
17,598,  and  in  1913,  1,102,886  creosoted 
ties  were  put  in. 

The  depth  of  ballast  in  1909  was  from 
8  to  12  inches,  and  the  standard  has  now 
been  established  as  18  inches.  While  the 
first  cost  of  the  increased  depth  is  charge- 
able to  additions  and  betterments,  operat- 
ing expenses  are  increased  by  the  renewal 
of  cinder,  gravel  and  slag  ballast  placed 
under  track  a  few  years  ago  and  will  in- 
crease as  the  additional  stone  ballast  wears 
out. 

The  number  of  ties  used  per  mile  has 
been  increased  in  order  to  strengthen  track 
for  use  of  heavier  equipment;  prior  to 
1909  the  number  of  ties  to  a  33-foot  rail 
was  16,  or  2560  per  mile ;  in  1909  this  was 
increased  to  18,  or  2880  per  mile,  to  com- 
ply with  which  policy  additional  ties  per 
rail  have  been  put  in  as  rapidly  as  pos- 
sible. 

*     *     *     * 

The  total  number  of  tons  of  rail  used 
for  renewals  in  1913  was  77,094  as  com- 
pared with  95,808  tons  in  1910.  There 
were  3023  miles  of  100-pound  rail  in  main 

152 


track  in  1910,  or  37  per  cent,  of  the  total, 
and  in  1913,  3534  miles,  or  43  per  cent, 
of  the  total.  There  were  3904  miles  of  85- 
pound  rail  in  main  track  in  1910,  or  48 
per  cent,  of  the  total,  and  in  1913,  3825 
miles,  or  46  per  cent,  of  the  total. 

Eighty-five-pound  section  was  adopted 
as  standard  in  1887,  and  100-pound  rail 
for  main  line  passenger  tracks  in  1892. 

As  was  the  case  in  some  other  instances, 
renewals  of  rails  in  1908  and  1909  were 
low,  which  made  it  necessary  to  use  larger 
amounts  in  1910.  The  consumption  in 
the  latter  year,  therefore,  was  considerably 
higher  than  the  average,  while  that  for 
1913  was  about  normal,  based  upon  the 
average  for  the  past  five  years. 

In  the  endeavor  to  promote  the  safety 
of  the  traveling  public  in  every  possible 
direction,  special  attention  was  given  to 
the  rock  cuts  between  Philadelphia  and 
Pittsburgh  and  overhanging  rocks  were  re- 
moved, at  a  cost  of  $72,852. 

Renewing  linings  of  tunnels  on  the 
Western  Pennsylvania  Division  and  main- 
taining an  improved  ventilation  system 
at  Baltimore  entailed  an  increased  expend- 
iture of  $29,032. 


"Safety"  Costs  More 

"Safety  work" — signs  and  signals  at 
crossings,  heavier  repairs  to  road  crossings 
and  fences — together  with  the  construc- 
tion of  a  large  amount  of  improved  fence 
in  New  Jersey,  represented  an  increase  of 
$36,206. 

The  signal  system  has  been  greatly  ex- 
tended during  this  period,  all  passenger 
tracks    having   been    put    under   absolute 

153 


block  system  in  1912,  in  addition  to  which 
there  has  been  a  large  extension  of  the 
automatic  signals  in  place  of  manual 
block  signals,  and  revisions  of  interlocking 
in  connection  therewith. 

In  1910  there  were  395  miles  of  auto- 
matic signals  and  3209  miles  of  manual 
block  signals;  in  1913  there  were  690  miles 
of  automatic  signals  and  3926  miles  of 
manual  block  signals.  These  change* 
must  continue,  resulting  in  increased 
charges  to  expenses  for  replacements  in 
kind  as  shown  above,  as  well  as  in  the  in- 
creased cost  of  maintenance. 


154 


The  Case  for  Increased  Railroad  Rates 


The  Position  of  the  Pennsyl- 
vania Railroad 

April  18,  1914. 

In  presenting  the  case  of  the  Pennsyl- 
vania System  in  applying  to  the  Interstate 
Commerce  Commission  for  a  5  per  cent, 
increase  in  freight  rates,  Mr.  Samuel  Rea, 
president  of  the  Pennsylvania  Railroad 
Company,  testified  in  substance  as  follows : 

"The  position  of  the  Pennsylvania  Rail- 
road System  is  not  so  strong  as  it  was. 

Changes  in  Fifteen  Years 

"1.  In  1898  the  company  was  emerging 
from  a  period  of  prolonged  and  very  se- 
vere depression,  whereas  in  1913  it  was  at 
the  end  of  a  great  period  of  growth.  It 
would  be  natural  under  ordinary  circum- 
stances that  the  owners  of  the  property 
should  find  themselves  very  much  better 
off  in  1913  than  they  were  in  1898. 

"2.  In  the  fifteen  years  between  1898 
and  1913  the  company  had  the  benefit  of 
the  following: 

"(a)  An  advance  in  certain  commodity 
rates. 

"(b)  The  abolition  of  rebates. 

"(c)  The  expenditure  of  hundreds  of 
millions  of  capital  for  improvement  and 
enlargement  of  facilities  and  equipment. 

"(d)  A  consequent  great  improvement 
in  efficiency  and  use  of  plant. 

"3.  In  the  fifteen  years,  1898  to  1913, 
property  investment  increased  from  about 
$792,000,000  to  almost  $1,387,000,000,  or 
75  per  cent. ;  operating  revenues  increased 
from  a  little  less  than  $145,000,000  to 
over  $382,000,000,  or  163  per  cent.;  oper- 

155 


ating  revenue  per  mile  of  track  operated 
increased  from  $8,178  to  $15,261,  or  87 
per  cent. ;  the  company  thus  had  during 
these  fifteen  years  all  the  benefits  arising 
from  a  remarkable  growth  of  business  both 
in  volume  and  density,  which  ordinarily 
under  the  law  of  increasing  return  should 
have  materially  improved  the  position  of 
its  owners. 

"4.  But  as  a  matter  of  fact  the  return 
on  property  investment  in  1913  was  only 
5.48  per  cent,  as  against  5.45  per  cent  in 
1898,  and  furthermore,  was  the  smallest 
return  in  any  of  the  fifteen  years  of  the 
period;  the  percentage  of  net  corporate 
income  (plus  interest  on  funded  debt)  on 
total  capital  obligations  in  1913  was  but 
6.88  per  cent,  against  6.65  per  cent,  in 
1898,  and  with  the  single  exception  of  the 
year  1899,  when  this  figure  was  6.70  per 
cent.,  it  is  the  lowest  of  any  year  in  the 
fifteen-year  period;  the  net  corporate  in- 
come per  cent,  on  capital  stock  outstand- 
ing held  by  the  public  in  1913  was  only 
9.64  per  cent,  against  8.53  per  cent,  in 
1898,  and  here  also  the  1913  figure  is  the 
lowest  for  any  year  in  the  fifteen-year  pe- 
riod with  the  single  exception  of  1899, 
when  the  figure  was  8.94  per  cent. 

"5.  The  conclusion  to  be  drawn  from 
these  facts  is  that  the  increase  of  expenses 
and  other  outlays  beyond  the  company's 
power  to  control  have  finally  overcome  the 
advantages  thus  far  realized  of  advanced 
rates,  abolition  of  rebates,  increased  vol- 
ume and  density  of  business,  large  ex- 
penditure of  capital  and  improvement  in 
plant  and  methods.  The  company  is  now 
confronted  by  a  rapidly  decreasing  rate  of 
return  on  property  investment  and  capital 

156 


obligations  and  is  unable  to  offset  these 
tendencies  by  any  methods  which  it  can  at 
present  apply  or  which  seem  to  be  practi- 
cally possible  other  than  an  advance  in 
rates. 

*     *     *     * 

"We  have  in  more  prosperous  times 
given  to  the  public  a  good  share  in  our 
prosperity.  We  desire  to  continue  to  live 
up  to  a  high  standard  of  public  service, 
but  whether  we  can  do  so  or  not  depends 
on  the  decision  of  this  commission. 

"Unless  the  gap  between  receipts  and 
expenditures  can  be  widened,  we  must  be- 
gin to  retrench,  and  retrenchment  must 
begin  on  betterments  and  improvements 
not  directly  necessary  to  the  movement  of 
trains.  We  should  be  very  reluctant  to  do 
this,  as  it  would  be  to  run  counter  to  our 
traditions  and  practice  of  half  a  century, 
and  we  are  sure  that  it  would  not  be  in 
the  public  interest,  and  we  do  not  believe 
the  public  desire  it. 

"I  would  not  create  the  impresssion  that 
a  5  per  cent,  rate  advance  is  necessary  to 
the  maintenance  of  the  Pennsylvania  Rail- 
road Company's  dividends  in  the  immedi- 
ate future,  although,  if  it  cannot  be  ob- 
tained, it  may  be  necessary  for  the  com- 
pany to  curtail  the  necessary  provision  to 
preserve  that  high  standard  which  the 
public  has  grown  to  expect  from  it. 

"Any  general  idea  that  the  Pennsylva- 
nia Railroad  Company's  position  is  so 
strong  as  not  to  need  any  additional  rev- 
enue is  not  correct,  because  only  4.84  per 
cent,  was  earned  on  the  money  invested  in 
the  railroad  and  equipment  of  the  Penn- 
sylvania Railroad  Company  and  the  lines 

157 


east  of  Pittsburgh  directly  operated  by  it 
during  the  year  ended  June  30,  1913. 

"This  company  has  paid  a  return  on  the 
stock  in  every  year  since  its  incorporation, 
but  in  the  past  thirty-six  years  the  cash 
dividends  have  never  exceeded  6  per  cent, 
per  annum,  except  in  1881,  when  8  per 
cent,  was  paid,  and  in  1882  and  1906, 
when  6 14  per  cent,  was  paid,  and  in  1907 
when  7  per  cent,  was  paid.  Cash  dividends 
since  1847  have  averaged  6.01  per  cent,  on 
par  ($50  per  share). 

*     *     *     * 

Eighty-nine  Thousand  Stockholders 

"Our  company  is  owned  by  over  89,000 
stockholders,  and  the  average  holding  is 
about  113  shares.  Fully  48  per  cent,  of 
this  number  is  made  up  of  women,  and 
two-thirds  of  the  stockholders  do  not  hold 
over  $2500  each  of  stock.  ' 

"Since  1907  our  large  body  of  stock- 
holders have,  like  everybody  eTse,  had  to 
face  the  higher  cost  of  living,  that  is  with 
the  decreased  purchasing  power  of  the 
dividend.  We  have  not  been  able  to  re- 
lieve them  by  any  change  in  the  rate  of 
dividend,  although  it  is  recognized  that 
some  of  them  subscribed  for  the  stock  at 
20  per  cent,  above  par  and  their  return  is 
but  5  per  cent,  per  annum.  The  bond- 
holders who  converted  their  holdings  into 
stock  at  140  per  cent,  obtain  a  return  of 
only  4.29  per  cent.,  while  those  who  con- 
verted their  bonds  at  the  fixed  rate  of  150 
per  cent,  receive  only  4  per  cent,  per  an- 
num on  their  investment. 

"The  stockholders  have  pursued  a  very 
liberal  policy  in  using  the  surplus  of  past 
years  for  betterments  and  to  maintain 
a  high  and  safe  standard  of  railroad  serv- 
ice. 

158 


Future  Policy 

"But  what  is  to  be  our  policy  in  the 
future?  The  striking  shrinkage  of  net 
operating  income  in  recent  years  compels 
us  to  review  and  reconsider  it;  we  cannot 
stand  still;  we  must  advance  with  a  grow- 
ing country  for  which  there  is  yet  much 
to  l>c  done,  or  go  backward. 

"It  is  unwise,  as  well  as  unnecessary  to 
com  in  it  ourselves  to  any  large  fixed  pro- 
gram of  expenditures,  except  to  say  that 
without  assurance  of  adequate  earnings 
they  cannot  proceed,  and  a  reasonable  por- 
tion of  the  cost  of  these  future  enlarge- 
ments and  improvements  ought  in  our 
judgment  to  be  provided  from  surplus 
earnings. 

"The  Pennsylvania  Railroad  ought  to 
continue  its  traditional  policy  of  paying 
stable  and  reasonable  dividends  and  put- 
ting back  into  the  property  a  reasonable 
portion  of  its  surplus  for  additional  facili- 
ties and  improvements  for  the  public,  but 
if  we  are  to  be  prevented  from  securing 
reasonable  rates,  I  am  forced  to  deal  with 
the  question  whether  that  policy  is  still 
sound.  The  question  must  be  faced  from 
two  points  of  view — that  of  the  stockhold- 
ers and  that  of  the  public,  including  in  the 
latter  all  dependent  on  the  railroads  for 
support  as  well  as  service. 

"From  the  stockholders'  point  of  view, 
I  desire  now  to  say  that  our  present  divi- 
dend, unless  it  is  absolutely  secure  in  good 
and  bad  years,  is  not  a  fully  reasonable  re- 
turn to  our  shareholders.  The  fact  that 
we  have  not  paid  to  our  shareholders  many 
millions  of  dollars  earned  as  a  profit,  at 
\ovy  low  rates,  which  profit  might  without 
objection,  either  legal  or  moral,  have  been 

159 


paid  out  as  dividends,  but  instead  have  de- 
voted this  money  very  largely  to  the  im- 
provement of  the  public  service,  entitles 
us  to  make  this  claim. 

"If  we  are  allowed  to  earn  a  net  income 
that  will  make  our  dividends  safe  beyond 
reasonable  risk  the  company  will,  I  doubt 
not,  continue  its  established  policy  of  de- 
voting a  large  portion  of  its  surplus  to 
improvements  and  the  maintenance  of  a 
safe  and  high  standard  of  transportation 
service. 

"Rut  if  the  security  of  our  dividend  is 
to  be  imperiled,  we  must  do  what  we  can 
to  protect  ourselves,  and  we  shall  be 
forced  to  seriously  consider  the  propriety 
of  insuring  against  a  reduction  of  divi- 
dends in  bad  years  by  devoting  in  good 
years  our  additional  earnings  not  to  the 
improvement  of  property  devoted  irrevo- 
cably to  public  service,  but  to  a  reserve 
dividend  fund  for  our  shareholders. 

"Experience  indicates  that  the  practice 
of  putting  back  into  the  property  the  sur- 
plus beyond  a  reasonable  dividend  is  in 
the  interest  not  only  of  the  shareholders, 
who  thereby  tend  to  insure  the  perma- 
nence of  their  dividend,  but  also  of  the 
public,  who  thereby  insure  the  continu- 
ance of  the  provision  of  adequate  facilities, 
even  where  they  are  not  directly  dividend 
earning.  Is  not  the  policy  of  betterments 
from  income  at  least  more  in  the  public 
interest  than  dividing  the  entire  net 
profits  ? 

"In  all  of  this  it  should  be  recalled  that 
while  improvements  and  betterments 
made  out  of  surplus  income  become  the 
property  of  the  shareholders,  they  are 
property  dedicated  to  a  public  use,  and  as 

160 


stub  subject  to  public  regulation,  and  only 
by  the  pursuit  of  this  policy  for  over  fifty 
years  has  tbe  Pennsylvania  Railroad  Com- 
pany  been  able  to  maintain  its  dividends, 

and    its  surplus  is  not  excessive. 


'•'Flic  position  of  tbe  Pennsylvania  Sys- 
tem  is  clearly   revealed   in   tbe  following 

brief  digest: 

"In  ten  years   (June  30,  1903,  to  June 

30,  1013)  : 

Property  investment  in  rail- 
road and  equipment  has 
increased    530  millions 

Operating  revenues  in- 
creased        149  millions 

Operating  expenses  in- 
creased        129  millions 

Xet  operating  income  (after 
paying  taxes,  rents,  and 
equipment  hire)   increased     12  millions 

or  a  return  of  only  2.23  per  cent,  on  tbe 

increased  investment. 

-In    the    last    three   years    (1911-1912 

1913)  : 

Property  investment  in  rail- 
road and  equipment  has 
increased    201  millions 

Operating  revenues  in- 
creased          1?  millions 

Operating  expenses  in- 
creased         5[  millions 

Xet  operating  income  (after 
paving  taxes,  rents,  and 
equipment  hire)  decreased    11  millions 

Conclusion  to  be  Drawn 

"Wliat    is   tbe   conclusion    to    be    drawn 
from  all  of  this? 

161 


"1.  The  margin  of  surplus  is  steadily 
diminishing,  and  the  company  is  not  re- 
ceiving any  return  either  on  the  additional 
capital  invested,  or  for  the  value  of  the 
service  rendered  and  the  facilities  pro- 
vided for  public  use. 

"2.  Had  there  been  no  surplus  in  earlier 
years,  and  had  the  whole  of  the  improve- 
ments been  paid  for  out  of  capital,  the 
margin  would  now  have  reached  the  van- 
ishing point. 

"3.  If  surplus  steadily  decreases,  im- 
provements, if  made  at  all,  will  more  and 
more  need  to  be  made  out  of  new  capital. 

"4.  But  if  the  margin  of  safety  de- 
creases, new  capital  will  only  be  raised 
with  greater  difficulty  and  on  more 
onerous  terms. 

"5.  Indeed,  it  is  questionable  whether, 
if  new  capital  is  to  continue  to  earn  no 
income,  the  directors  will  be  justified  in 
attempting  to  raise  more  than  a  modicum 
of  what  they  believe  necessary,  as  the  ef- 
fect must  be  to  reduce  the  percentage  re- 
turn on  the  shareholders'  capital  already 
invested/' 


162 


The  Case  for  Increased  Railroad  Rates 


Railroad  Returns  for 

First  Eight  Months  of 

Current  Fiscal  Year 

April  26,  1914. 

The  thirty-five  railroad  systems  in  Offi- 
cial Classification  territory  which  are  ap- 
plying for  a  5  per  cent,  increase  in  freight 
rates  have  compiled  and  just  filed  with  the 
Interstate  Commerce  Commission  data  set- 
ting forth  results  of  their  operations  for 
the  first  eight  months  of  the  present  fiscal 
year. 

During  the  period  from  July  1,  1913,  to 
February  28,  1914,  the  revenues  of  these 
companies  decreased  from  $931,508,361 
to  $910,346,537  as  compared  with  the  pre- 
vious year. 

For  the  same  period  expenses  increased 
from  $645,404,193  to  $683,364,514. 

There  was  thus  a  decrease  in  revenues 
of  $21,161,824,  and  an  increase  in  ex- 
penses amounting  to  $37,960,321 — or  a 
loss  in  net  operating  income  of  $59,122,- 
145. 

When  to  the  foregoing  fact  is  added  an 
increase  in  taxes  of  $2,507,471  and  a  de- 
crease in  net  revenue  from  outside  opera- 
tions, there  is  shown  a  loss  in  operating  in- 
come of  $69,355,881,  or  26  per  cent. 

Assuming  that  no  additional  money  has 
been  invested  in  these  properties  since 
July  1st  of  last  year,  the  returns  for  the 
current  eight  months  show  4.47  per  cent, 
earned  on  property  investment,  as  against 
5.53  per  cent,  in  the  corresponding  eight 
months  of  last  year. 

163 


The  Pennsylvania  System  in  the  same 
period  shows  4.92  per  cent.,  as  against 
5.56  per  cent,  in  1913.' 

The  New  York  Central  Lines  show  3.56 
per  cent.,  as  against  5.63  per  cent,  in  1913. 

The  Baltimore  and  Ohio  System  shows 
4.10  per  cent.,  as  against  4.63  per  cent, 
in  1913. 

The  Erie  System  shows  2.75  per  cent., 
as  against  3.91  per  cent,  in  1913. 

The  Pennsylvania  Railroad  System, 
Baltimore  and  Ohio  System  and  New 
York  Central  Lines  show  4.23  per  cent., 
as  against  5.44  per  cent  in  1913. 

The  rate  of  return  on  property  invest- 
ment that  is  shown  by  all  these  railroads 
for  this  portion  of  the  present  year  is  the 
smallest  of  any  year  in  the  last  fifteen 
years. 


164 


